Monday, 24 February 2020

It's tempting to see any windfall — like a tax refund — as an invitation to splurge. However, it's probably smarter to see your refund as an opportunity to boost your savings or pay down debt.

Sure, stashing your tax refund away in a savings account won't be as fun as a vacation or a shopping spree. But using your refund wisely today can really pay off in the future.

So, how can you best use your tax refund to improve your personal finances?

Start with savings

Build an emergency fund. Having an emergency fund is one of the best ways to boost your financial wellness. Most financial experts recommend having enough money set aside to cover three to six months of expenses. And while that might seem like a lot of money, what matters most is getting started. Earmarking a portion of your tax refund is a great way to do that.

All you need to start building your emergency fund is a basic savings account, which you can most often open with minimal funds. Most savings accounts have low fees and give you easy access to your money. Plus, you can grow your emergency fund automatically by having money transferred from your checking to savings account each month. Even $50 a month will add up over time.

Use your money to make some money. Opt for an account that pays more interest than a basic savings account and you can make your money work for you.

A Money Market account typically pays a higher rate of interest than a basic savings account. You can typically open a Money Market account with a minimal amount, but many of them have tiered interest rates, which means you'll earn a higher rate of interest on bigger balances.

A Certificate of Deposit (CD) offers you the ability to earn an even higher interest rate, although it limits your access to the money during the term of the CD, which can range from a few months to several years. The opening deposit for CDs can range from $0 to $2,500.

Think retirement. It's never too early to start saving for retirement — using your tax refund is an ideal way to start building your nest egg.

There may be a minimum opening deposit requirement for Individual Retirement Accounts (IRAs); in most cases, opening an IRA can offer you some tax benefits as well. While you can't access your money until you near retirement age without paying a penalty, you will be saving for retirement, which is extremely important.

What about paying off debt?

Using your tax refund to pay down debt can also be a smart way to get yourself on more solid financial ground.

Credit card debt. Credit card interest rates are typically higher than other types of debt. If you're interested in paying down debt, your credit card balances are a smart place to start. If you have multiple credit cards with balances, a good rule of thumb is to focus on paying down the card with the highest interest rate first.

Loans or mortgages. It never hurts to pay down debt of any kind, but before you decide to pay off loans or mortgages, make sure you're putting your refund to the best possible use. Paying off a car loan or personal loan might be a good way to give yourself some wiggle room in your monthly budget, so long as there are no prepayment penalties.

Paying your mortgage off early can save you money in the long run, but it could be more beneficial to build an emergency fund or start saving for retirement.

Have your cake and eat some, too

Of course, there's no rule saying you have to put 100 percent of your tax refund toward savings or paying down debt. You could always choose to use a small amount of your refund to treat yourself for a year of hard work or stash the rest away for a rainy day. 

Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.

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