According to the IRS, more than 36 million Americans have received a tax refund so far. If you’re one of them, you probably have a laundry list of things you want to do with that money, especially in this pandemic year, when most budgets were disrupted. Most likely, your tax refund will not be large enough to cover everything, so what are the best ways to put it to work for you? Here are five smart ways to stretch your tax refund and get closer to your budget goals.
1. Invest in Your Future
Retirement savings is still a critical component of your financial health. Use your tax refund to catch up on any missed investments in your retirement accounts. For instance, do you have a 401(k)? If you didn’t make the maximum contributions, you have until April 15, 2021, to do so. The maximum 2020 401(k) contribution is $19,500. If you’ve over 50, you can make a “catch-up” payment of $6,500. You have until April 15, 2021, to max out your IRA or Roth IRA too.
If you kept up with your retirement savings, put your tax refund into an educational fund for yourself or into a 529 college savings plan for your children. Your savings will grow, and when you’re ready to go back to school or send your children to school, you’ll have a nice nest egg.
2. Build Up Your Emergency Savings
One of the things living through a year of a global pandemic taught everyone is the importance of saving for emergencies. Three or more months of emergency savings enabled consumers to pay their monthly bills while waiting to return to work or pivot into something new. Many financial experts today suggest that emergency savings become your number one priority. Stretch your tax refund by putting a portion or all of it into your emergency savings account. Aim to get it to six months of living expenses if possible. You’ll have money to deal with car problems, loss of income, or a medical emergency without needing to use your credit card.
3. Pay Some Bills in Advance
Make extra payments on your mortgage, auto loan, or personal loans. Reducing the balance means you’ll have fewer interest payments and more money to put toward emergency savings, retirement, and education in the near term. And you can get to your bucket list much sooner.
4. Reduce Credit Card Debt
If you can get your credit card balances to zero, you’ll save money this year. Carrying balances keeps you in debt longer. Potentially you could see your interest rate increase. And the more debt you have, the lower your credit score. One smart way to stretch your tax refund is to put it toward paying off your highest-interest credit card. Doing this will free up money that you can use to pay off your other credit cards and personal loans.
5. Make a Charitable Contribution
Food banks, legal services, and other human resource non-profits have seen their budgets stretched to the limits. Donating a portion of your tax refund is one way to extend its impact in the world. You’ll help organizations achieve their mission and receive a small tax break too.
Thinking ahead to next year, you might want to revisit your withholding statement. It’s better to have more money in your paycheck each month, even though it can be fun to get such a nice check from the IRS. A healthier monthly cash flow enables you to pay your credit card balances, stay on top of your savings goals, and make those large purchases when you want to.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a free financial analysis.
Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high-interest credit card debt any longer.