If you’re expecting a tax refund this year, you might be pondering, with the recent inflation spikes and gas prices increasing, how much this money is needed and want to spend it right away. Before you do that, I suggest reviewing these three areas below before making a rash decision and weighing all your options on where to place your money.
Put Your Refund in Savings or Create an Emergency Fund:
Having a savings plan in place and consistently adding to it is one of the most critical areas of personal financial planning. Time and time again, I see individuals wanting to hurry and spend their refund for a specific purchase, but have you ever had one of those months? The water heater stops heating, the dishwasher stops washing, and your family ends up with the nurse at urgent care on a first-name basis. Then, as you're driving to work, you see smoke coming from under your hood. Bad things happen to the best of us, and sometimes it seems like money comes in waves.
Consider placing your refund or a portion of it into your personal savings account or creating an emergency fund for those moments that surprise you and leave you in a bind financially.
Add to Your Retirement Account:
Often, individuals forget about their retirement accounts until they’re ready to retire. It’s not always in plain sight and typically on auto-deduction from your paycheck, and it’s easy to adopt the out-of-sight, out-of-mind mentality. But the reality is, you always need to be thinking about your retirement savings in tandem with your financial plan to ensure you’re financially confident once you are no longer working.
4 in 10 workers report that their household experienced income or job loss in the past year, and half of those who had this negative experience report feeling less confident they will have enough money for a comfortable retirement (compared with a third of workers overall who feel less confident and a quarter of those who did not experience income or job loss) according to the new Employee Benefit Research Institute (EBRI) 2021 Retirement Confidence Survey. For most, retirement is the "next chapter" in life. Your finances must support your retirement vision, so there are no surprises when it's your turn.
Consider placing your refund into your retirement account to help even further prioritize your long-term goals. If you don’t have a retirement account through an employer, consider setting up a tax-advantaged investment account like a Roth IRA.
Pay Off High-Interest Debt:
If you have credit card debt racking up interest, creating a plan to pay it off is an excellent way to use this year’s tax refund. The Federal Reserve has raised its benchmark interest rate by a quarter of a percentage point.. meaning this could impact how much interest you’re being charged on credit cards. If you’re currently only making the minimum payment, you could still pay thousands due to interest.
Consider using this year’s refund to pay off more than your monthly payment to ensure you’re paying down as much debt as possible to shrink your balance. At MRK, we have a staff of financial professionals who can work with you to create a roadmap to pay down personal loans and debt so that you can work to become financially independent.
Tax refunds can be the most considerable lump sum of money individuals receive all year. Before deciding to spend your refund, look to invest, save, or pay down debt. If you have any questions on ways to use your tax return wisely, I suggest reaching out to a member of our team so we can discuss how to make the most of your financial opportunities using this year’s tax return.