Tax refunds are easily the best part of tax season. It can be tempting to blow it on something that you have had your eye on for a while, but a tax refund can be a great boost for your finances. Keep reading for smart ways to spend your tax refund in 2022.
1. Pay Down Your Debt
Paying off debt can be swallowing up most of your income. And the longer you pay just the minimums, the more money you will owe in interest over time. No matter the debt - credit cards, student loans, medical bills, etc. - the quicker you pay it off, the better. With your tax refund, you could pay down a decent chunk of your debt. Start with your highest interest debt first and work your way down if you can. If you have multiple high-interest debt accounts, start with the smallest balance first. You can also start with the smallest balance first if you think you’ll get motivated by seeing debt paid off quickly. Tackling your debt is one of the best ways to reach financial freedom.
2. Fund Your Emergency Savings
If you don’t already have an emergency fund, it’s time to start one. You never know when an unexpected bill can come in the mail, have an accident happen, or have a sudden loss of income so it’s important to have money set aside. It is recommended to have three to six months of expenses saved in your emergency fund. Using your tax refund to start your emergency fund or contribute more to it is a great jump start to protecting yourself from financial hardships and avoiding debt.
3. Contribute To Retirement
You can never go wrong with contributing extra to your retirement accounts. You’ll thank yourself later. The more time you allow your money to compound interest, the more you will have to live on in your golden years. In 2022, you can contribute up to $20,500 in a 401(k) with a $6,500 catch-up if you are 50 years old or older. For Traditional and Roth IRAs you can contribute $6,000 in 2022 with a $1,000 catch-up for those age 50 and up. If you’re already on track for your main retirement contribution accounts, consider opening another retirement account or after-tax investment account to contribute to.
4. Start A College Fund
If you want to give a special gift to your children or grandchildren, a college fund is a great way to do so. By setting up a 529 plan for them while they’re young, you’re providing them with savings to pay for higher education expenses. With rising tuition costs, any money they can put towards college expenses is helpful. They will benefit from tax-free withdrawals for qualified education expenses when the time comes.
5. Set It Aside For Something Else
If there is something else that you are saving for, such as a down payment on a house or a down payment on a new car, put your tax refund towards that. If these things you’re saving for are a few years in the future, utilize a high yield savings account so you can watch your savings grow over time. This allows you to take advantage of the time between now and when you are ready to purchase the big-ticket item without subjecting the money to short-term market ups and downs.
Trying to decide how to spend your tax refund can be difficult. If you’re having trouble deciding what way would be best for your financial well-being, our advisors at Lifebridge Financial Group are happy to help. Give us a call today to get started!