It’s that time of year again. Tax season is upon us and, if you file correctly, that can mean cash back. Though many people rely on their tax return for basic needs such as winter heat, if you have your immediate needs met, consider the advice of United Way’s network of local financial experts on the smartest ways to use your return.
To start, financial coach Jim Graham of Quincy Community Action Programs recommends that you focus on preventive rather than remedial uses for a refund, anticipating future needs will arise. Plan for them to minimize future debt or cash flow problems. Use your refund to plan for unusual expenses such as travel, replacing a car, or a major life event. A refund recipient should also consider where to set aside such funds. Making them less accessible, like in a savings account or a different bank to which they don’t have online access, can provide some self-imposed financial discipline.
Put the money somewhere accessible, where it can earn interest. Though you might be inclined to pay down debt first, according to Graham that’s a mistake.
“My first concern is always emergency savings. If someone doesn’t have a base level of reserves (probably an absolute minimum of $500), then I’d suggest prioritizing that over everything – even ahead of paying more than minimums on credit card debt. With no available reserves, the next unexpected event is going right on a credit card – assuming an available credit line – and worsening the debt situation.”
Ideally, your emergency fund will cover 6-8 months of living expenses, but starting with a $500 minimum will give you peace of mind in case of an emergency. If paying off debt is a priority, Southern New Hampshire Services recommends taking “half of the refund and depositing it into a savings account and using the other half toward the highest (or most immediate) debt owed.” If you already have an emergency fund in place and have no pressing debt, consider saving toward your other financial goals such as a retirement fund, a tax-sheltered account (Roth IRA), your kids’ college fund (529), or a high-yield savings account.
#2: Pay off debt
Next up, it’s time to pay off debt. As Graham says, “A refund could be a good way for someone to get herself out of the ‘hot seat.'” If your emergency fund is already in place, prioritize your debt by paying off the accounts with the highest interest rates first. This can save you thousands over the lifetime of a loan and doing so early on helps build your credit. In turn, strong credit allows you to move toward your other financial goals – whether it’s going back to school, owning a home or buying a car. For more tips on boosting your credit score, visit Boston Builds Credit.
#3: Invest in yourself
If you have the basics covered, your emergency fund in place, and any pressing debt paid, consider investing in your professional development. Sign up for a continuing education course or attend a conference to gain new skills in your field of work. It’s similar to putting money into a high-yield savings account -while the benefits may not be immediately tangible, you are building your personal value which will pay off in the long run.
Finally, if you’re in a position to do so, consider donating a portion of your refund to help those in need. Not only does giving back bring you and those you help joy, it also helps build a stronger community for all of us. You can even give toward United Way’s network of free tax prep sites to help others maximize their returns as well. Last year, United Way’s partnering sites helped return $8 million in tax credits and refunds to the lowest-income taxpayers. Your gift helps them access returns they use to keep the heat on through the winter and more. You can donate to support these programs here.
Finally, keep in mind that you don’t have to spend it all in one place. Depending on your unique financial situation, you can save part of it, invest in a professional development course and pay off your highest interest credit card debt. Get creative with your strategy and make sure you’re making your return work for you.
If you need help with your tax return, visit MyFreeTaxes.com or connect with one of United Way’s volunteer tax prep community partners: Beverly Bootstraps, Chelsea CONNECT, the City of Boston’s Office for Financial Empowerment, Greater Lawrence Community Action Council, Jewish Vocational Services, North Shore Community Development Corporation, Quincy Community Action Programs or Southern New Hampshire Family Services.