It’s that wonderful time of the year when many readers are expecting a nice direct deposit from the IRS in the coming days, providing a refund from their hard earned income you generated in 2019. Your tax refund is a great opportunity to position yourself financially in a better place heading into the year, however if you are not deliberate and intentional, you can watch that money disappear quickly.
Take a look at our list of five simple ways to maximize your income tax refund this year.
Create your emergency fund
This tip would be for those who may be just starting out on their journey to improving their finances. If you haven’t yet done this, make sure you set aside a minimum of $1,000 in a rainy day account. We personally prefer to stretch this to $1,500, and suggest you place these funds in either a simple interest bearing savings account in a completely separate credit union/bank than your primary checking, or in a long-term CD (12 months or more). You are not putting this money aside to make money, but rather to truly remove it from the possibility of spending it as you build a savings habit.
Pay down your debt
Our personal favorite plan of action for the tax refund is to throw it on a pile of your existing debt. Don’t overthink which credit card or loan should receive the funds, simply select the method that makes the most sense for you – the debt snowball or debt avalanche. Our preference is the debt snowball, where you pay down debts from smallest to largest, and if you have not yet built up the savings muscle and self-control muscle in relation to revolving credit, cut up your card or restrict additional purchases from occurring after the pay off.
Beef up your savings
If your unsecured debt is wiped out, consider leveraging your tax refund to fully fund your emergency savings account. A fully-funded account in our view is at least four(4) months of your living expenses, although we suggest stretching to eight(8). If you already have that in place, earmarking these funds for your retirement could be a great option.
Pay down the principal
Some of our readers are at this point in their personal finance journey, where any excess funds can be applied to paying down the principal balance of their primary residence. We only suggest this if the above steps are already accomplished, however by throwing a few extra thousand dollars on the principal of your mortgage, you accelerate the time of being debt free.
Give a little, then treat yourself
This could be a great time to donate to your favorite charity, or provide a little extra at your local church. Once you have practiced generosity, don’t feel bad about spending a little on yourself. If you have your emergency fund in place, have your savings and retirement funded, paid off your unsecured, non real estate debt, and experienced the joy of giving, then buying something nice for yourself is in order. You should be proud of your accomplishments, as you are headed in the right direction!