Because of the July 15th extension for American citizens to file their tax returns, some individuals may not have received their refund yet. Even for those who have received their refunds, thinking carefully about how best to apply these extra funds can help them make wise financial choices that can keep their finances healthy and better prepare them for the future.
Put It Towards Debt
Paying off debt, especially accounts with high interest rates, is a productive application of a tax refund. Existing medical bills and credit card bills are the perfect targets. By using a tax refund to pay off debt, individuals can improve their credit score and grant themselves more peace of mind.
Bolster (Or Build) An Emergency Fund
Even healthy emergency funds can stand to get a boost. Dedicating at least a portion of a tax refund to an emergency fund can help individuals build a safety net should they need to cover unexpected medical costs or suddenly become unemployed. In uncertain times like these, ensuring that emergency funds are sufficient can make a significant difference in financial stability and overall fiscal health.
Set It Aside
Some individuals may choose to put aside their tax refunds to save for something specific.
Creating a college fund, saving for a future vacation, or preparing for a down payment on a home or vehicle are all valid options when it comes to setting aside the money received as a tax refund. In these cases, using a money market or savings account is a wise option as the funds will earn interest while you build your nest egg.
Make It Work Harder
Investing for the longer term is also a wise choice. Consider increasing your contribution to your 401k to maximize a company match. Individual Retirement Accounts (IRA’s) are another consideration. Both allow for tax deferred growth and may help you reduce your tax obligation. (Be sure to consult with a tax advisor before making any decisions related to taxes). Taxable investment accounts are yet another consideration. Remember that accounts such as these allow you to purchase investment vehicles like mutual funds or Exchange Traded Funds that may fluctuate in value. Consult an investment professional for guidance.
Improve Your Space
With many people working from home for extended periods of time due to the ongoing pandemic, it is possible that they have identified areas of the home that could use an upgrade. Whether that means investing in new furniture to make their home office more comfortable or replacing old or damaged appliances, using tax refunds to improve their physical living space is a great idea, especially in regions where stay at home orders have been extended.
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