Save, Invest, or Pay Off—Three Options to Optimize Your Tax Refund

Saving

You can never be too sure about what the future holds. That’s why it’s important to consider having a solid savings account with three to six months of estimated living expenses. Using your tax return to boost an emergency fund is certainly a strategy to consider, especially if you don’t currently maintain a savings account. Emergency fund aside, saving to support your children’s college education could be a wise option. An average tax return can provide a good initial deposit to a college savings plan. Commit to putting funds into the account every month, and you’ll be surprised at how quickly it can impact your college savings outlook.

Investing

Investing your tax refund into a Roth or traditional IRA for retirement is a viable option. If you are new to the investment world, talk to the experts at your local financial institution. Many offer competitive, low-risk investment options, such as money market accounts or share certificates, and some are even tax deductible if you contribute before the filing deadline. Home improvements could also be considered an investment. Although it’s unlikely that your tax return will cover an entire kitchen or bathroom remodel, there are simple projects that can be tackled to update your home and hopefully improve future resale value. Consider small projects such as painting, updating hardware, or installing a decorative backsplash. Replacing old or failing appliances with new, energy-efficient models is also a worthwhile investment that may demonstrate a return in the form of lower monthly bills.

Paying Off Debt

Many individuals choose to allocate their tax return to paying off high-interest debts, a tactic that provides you with immediate savings! If you have several debts to tackle, consider starting with the highest-interest-rate debt first and working your way down. If your tax return helps but doesn’t cover the entire balance, you may consider transferring the remainder to a low-interest credit card or personal loan. Designating your tax return toward your mortgage payment is also a sensible option when it comes to paying off debt. Consider this: Paying one extra, full payment every year on your mortgage has the potential to save you thousands in interest, shorten the life of your home loan, and build equity faster.

Every individual’s financial situation is unique. What’s best for one person may not be the right decision for another. Before committing your tax return to any one option, consider consulting a financial advisor to discuss your personal financial situation.