As Midwesterners, we seem to appreciate spring more than most, eagerly shaking off the winter doldrums and welcoming the earliest signs of warmer temperatures.
The thaw also reminds us that tax season is upon us. For most, that means hours of shuffling through paperwork, filling out forms, digging through file cabinets, searching for receipts and trying to make sense of complicated laws. Yet despite the hassle, getting a refund—similar to an unexpected sixty-degree spring day—should be appreciated in the end.
Instead of rushing to your favorite store or fancy restaurant to celebrate your return, resist the impulse to spend and consider utilizing the money to strengthen or assist other areas of your overall financial picture. Here are a few ideas:
Take a comprehensive look at your debt situation. Is it becoming increasingly difficult to take out a loan or pay off a high-interest credit card bill? Applying all or a portion of your tax refund toward your debt can help provide relief. Generally, it’s good practice to try and reduce high-interest debt first.
Remember, using your refund to pay down debt uses money that does not have to be re-allocated from other areas. Using a $2,000 tax refund to chip away at debt is $2,000 that does not have to come from your child’s college savings or other invested assets.
Build specific savings
We all own important tangible assets that will deteriorate over time. Items such as cars, appliances and furniture are all expensive purchases that generally have a lifespan and will eventually need to be replaced. Consider utilizing some of your tax refund to start an itemized savings account specifically reserved to replace a deteriorating asset. Make sure to build this account over time with additional contributions, as the tax refund will likely only serve as the foundation. When the time comes to eventually replace that item or asset, you’ll already have a jumpstart on affording the expense.
Pad your emergency account
Experts recommend stocking an emergency account with enough funds to sustain living for three to six months to provide a financial safety net. Many build their emergency savings account by automatically allocating a small portion of income each month, similar to retirement. Depositing a large tax refund can be a huge boost to the account.
Similar to addressing debt, using a tax refund to pad an emergency account also helps fortify your financial portfolio by lessening the probability of having to draw from other accounts or investments in the case of an unexpected event.
Think outside the box
There are many ways to allocate a tax refund, but donating to charity or taking a class are two that don’t generally come to mind. Contributing to a 501(c)(3) or a cause you care deeply about can be a great use of the funds. After all, a tax refund represents a form of unexpected income, and what better way to utilize it than by making a positive impact in the community?
You can also use the refund to better your career or start a new hobby by taking a class—perhaps you’ve had your eye on an evening degree program or a writing class? A tax refund may be the financial start you need to turn this aspiration into a reality.
Receiving a refund is a welcome part of tax season. Keep in mind that applying the money to other areas of your finances can help improve your overall standing for 2017 and beyond.