Are you receiving a tax refund this year? Here are some tips to help you effectively allocate this money to improve your personal finances!
1. Debt Reduction - First, you want to pay off credit card debt or other high interest rate or short term debt. You can prioritize multiple loans by highest interest rate or lowest balance. Then put your return toward the loan that is at the top of your list.
If your credit card spending is out of control, wait 48 hours after you see an item you want and before you purchase it to think about whether it's something you actually need. Or you could freeze your credit cards in a block of ice-that way they aren't readily available for impulse spending.
One way or another, it's important to create a plan to address your debt. Another resource is a webinar I created on Getting Out of Credit Card Debt. To view it, login to SaveUp and click "webinars" on the left.
2. Emergency Fund - Even with a tax refund to get us started, most of us will have to build our emergency savings slowly but surely. However, even having a few hundred dollars available to us in case of an emergency is a good place to start. Eventually you want about 3-6 months of expenses set aside for emergencies. Remember, this fund is strictly for emergencies. If you are tempted to dip into it for vacations, shopping, etc., then make the funds harder to access. For example, open an account at an institution where you don't do your other banking and don't set up checking or an automatic transfer feature on this account. In other words, make it difficult for yourself to spend this money. You won't be as tempted to spend it!
3. Retirement Account - Contributing your tax refund to a retirement account is one way to grow those funds. I also recommend making consistent contributions throughout the year. Automatic deductions from your paycheck can be very effective. The post "How To Maximize Your Retirement Plan's Tax Benefits" goes into more detail.
4. Prioritize Multiple Goals - Most of us have short or mid-term goals that will cost money. Your tax refund can be set aside for those goals. Additionally, SaveUp has a number of prizes to help you in that arena too. Think of the amount you might need to save in the next 1-5 years. What would you like to accomplish or experience and what might it cost? Start saving now and put your refund toward these goals.
5. Strike a Balance - Spend some of your refund! That might not be the advice you expect to hear from a certified financial planner, but it's important to strike a balance and not be too restrictive. Designate a certain percentage or a dollar amount that goes towards an immediate purchase or experience. Put the remaining amount directly toward improving your finances.
These tips apply to any lump sum of money. My hope is that they will help you spend your money in a meaningful way and improve your finances. Be purposeful with your hard earned dollars, so that you can work towards your goals, strike a balance and of course, continue to SaveUp!
This post was written by SaveUp's personal finance contributing writer, Catherine Hawley, CFP®.