How to make tax refund work to your benefit all year long
Our first instinct when we get a tax refund might be to splurge on something for ourselves. But there are ways to make that money work to your benefit all year long. Local financial advisory Brad Allen with Drake & Associates joins FOX6 WakeUp to help us think differently about our refund.
Pay Off High-Interest Debt
• It may not sound like fun, but paying off high-interest debt like credit card debt will impact you positively for years to come.
• Debt of any kind stands between you and your financial freedom, especially when entering retirement.
• You can also use your refund to make an additional payment on your mortgage, auto loans or student loans.
• If you’re struggling with where to start, talk with a financial professional to find a debt payment strategy that will work best for you.
Save for Your Next Emergency
• Saving money isn’t easy, but if living through a pandemic has taught us anything, it’s to be ready for the unexpected.
• 46 million people have said they depleted their emergency fund since the pandemic began.
• Use your refund as an opportunity to create, replenish or add to your emergency fund. I recommend having 3-6 months’ worth of expenses saved.
• If your tax refund doesn’t quite get you to that goal, be intentional about regularly setting money aside to build your emergency fund.
• Set up a direct deposit from your paycheck into a dedicated, easily accessible account for emergencies.
Take Care of Your To-Do List
• You can also use your tax refund to check items off your to-do list, such as repairs to your home or vehicle, upgrading appliances or even taking a class to learn something new!
• Minor kitchen renovations and exterior upgrades to siding, garage doors or decks offer the largest return on your investment.
• Making even small changes like adding a backsplash, painting, replacing a bathroom sink or sprucing up your yard can add value to your home.
• Also, consider making your home more energy-efficient, which will lower your monthly utility bills.
Invest in Your Future
• Use the arrival of your refund as a reminder to evaluate your retirement.
• Look at what you have saved for retirement, or meet with your financial professional to adjust your plan.
• Consider investing your refund in retirement accounts, like an IRA or Roth IRA.
• At Drake & Associates, we look at the entire picture, everything from taxes to Social Security to managing risk. Once we understand all of these areas, we can create a plan that combines them together.
Q: WHAT DO PEOPLE NEED TO REMEMBER WHEN IT COMES TO THEIR TAX REFUND?
• People often think of a tax refund as a bonus or a gift, but that’s really not the case.
• Your tax refund is your own money that you worked hard for, and it was withheld from your paycheck. The government is simply giving it back to you.
• Ideally, you want to have just enough withheld so your refund is as close to zero as possible, leaving you with more money every month to put into a savings account or invest.
• You can make changes to your withholding at any time by filling out a W-4 with your employer. This form determines how much income tax is withheld from your paycheck.
• The IRS has a calculator to help you determine your withholding. You can find it on my website, wealthwisconsin.com
Wise Ways to Use Your Tax Refund:
- Pay Off High-Interest Debt
- Save for Your Next Emergency
- Take Care of Your To-Do List
- Invest in Your Future