Once you have received your refund, you need to decide what to do with it. Many people use tax refunds to make large purchases they might not have the cash for at other times of the year. It can also provide a great opportunity to start a new savings option, contribute to your emergency fund, or reduce outstanding debt.
The IRS allows you to divide your federal tax refund into two or three additional financial accounts. By splitting your refund, you have a convenient option for managing your money – sending some of your refund to an account for immediate use and setting some aside for savings. For example, you could have part of your refund deposited to your checking account and the remainder sent to your Individual Retirement Account, or you might use some of your refund to purchase U.S. Series I Savings Bonds. (For more information on purchasing Savings Bonds with your tax refund, visit https://www.treasurydirect.gov)
You may also want to consider using your refund to start or augment emergency savings. Having emergency savings provides peace of mind when something unexpected occurs, such as a major car or home repair. The amount to set aside for your emergency fund will depend on factors such as your monthly expenses and the number of people in your household, but the general rule of thumb is to save at least three to six months’ worth of expenses.
If you are carrying a credit card balance, think about using your tax refund to pay it down or even pay it off. To get the most from your money, it may make sense to pay off a credit card with a high interest rate, compounding against you month after month. Going this route allows you to have more money every month once that credit card payment vanishes from your list of bills, and it can help build your credit as you reduce that debt.
Making extra payments on your mortgage may be another way to use your refund, saving you money over the long term. Since so much of your mortgage payment goes toward paying interest, using your tax refund to make an extra payment or two against the principal will go a long way to reducing the debt and overall cost of the loan.
If you are getting a tax refund this year, remember to take steps to keep your refund safe, know the refund options available to you, and consider different ways to make your money work harder for you.