As the end of the tax year approaches, it’s important to be intentional and plan ahead for how you will spend your tax refund. While it’s tempting to indulge in a splurge, there are smarter choices that can benefit you in the long run. Let’s look at some of the wise financial decisions you can make with your tax refund.
- Prioritise Debt Reduction: Instead of treating your tax refund as extra spending money, consider using it to reduce debt. Whether it’s credit card balances, personal loans, or outstanding bills, paying down debt can provide immediate relief and long-term financial freedom. By allocating a portion or the entirety of your tax refund towards debt reduction, you’ll reduce interest expenses, progressively improve your credit score, and strengthen your regular budget. It may not be exciting; however, this is how you can become debt free.
- Build an Emergency Fund: Creating an emergency fund is a crucial step towards financial security. Use your tax refund to kick-start or grow this fund, which acts as a safety net during unexpected situations like job loss, medical emergencies, or unforeseen expenses. While the ultimate goal is to save 3-6 months’ worth of must-pay living expenses in a separate bank account, start smaller with $500 and then increase it to $1,000. This financial buffer provides peace of mind and prevents the need to rely on credit cards or other loans during times of financial stress.
- Consider Education or Skill Enhancement: Investing in yourself can deliver long-term benefits. Use your tax refund to enrol in a course, attend a workshop, or acquire new skills that can enhance your career prospects or open doors to new opportunities. Professional development not only expands your knowledge but can also lead to increased earning potential and personal growth.
- Explore Investment options: Consider allocating a portion of your tax refund towards broadly diversified, low-cost Exchange-Traded Funds (ETFs) for potential long-term growth. ETFs are investment funds that trade on stock exchanges and aim to deliver returns without being too tricky about it. You don’t need to be an investment guru or monitor them every day. They are broadly diversified across a range of industries and companies.
Naturally there is risk involved and they will go up and down in value each day. This is for longer-term investing only, i.e., 7 years plus. Only consider this if you have paid off all of your non-housing debts and have a fully funded 3–6-month emergency fund saved.
Developing a clear plan for how you will divvy up your tax refund significantly increases your chances of making smart money decisions. It’s all too easy to get caught up in the excitement of receiving a lump sum of money and impulsively spend it.
By creating a thoughtful plan in advance, you establish a roadmap for your financial goals and ensure that your tax refund helps you move forward. Make a list of smart spending options and allocate specific amounts to each category. When the refund hits your bank account, you’ll be ready to go.
This plan will empower you to make the most of your tax refund and help you to Win with Money.
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