It is often the case that individuals pay more than what they’re expected to in taxes. The good news is that the government returns this excess in the form of a tax refund! As reported by Investopedia, a tax refund is considered a reimbursement to the taxpayer and is issued either through a check in the mail or direct deposit. Receiving a tax return can prove to be a healthy boost to your finances, at least for the short term. Whether you plan to pay off loans, start an emergency fund or use the money to invest in yourself, this article by Alugy will explore the best ways to utilize your 2023 tax return.
Pay Off Loans
One of the smartest things individuals can do with their tax refund is to pay off high-interest loans. This is because, due to the power of compounding, the longer one takes to repay a high-interest loan, the larger the repayment amount becomes. Common examples of high-interest loans include credit cards, student loans, and some types of personal loans. Using your tax refund to make a large repayment will significantly reduce your principal amount and shorten the repayment period by weeks, if not months.
Create an Emergency Fund
An emergency fund serves as a financial safety net when faced with unforeseen circumstances. As a rule of thumb, your emergency fund should at least have enough funds to cover costs of 2-3 months. This includes expenses such as rent, groceries, utility bills, and more.
According to a recent report by CNBC, up to 56% of Americans do not have enough funds to cover a $1000 emergency. This is an alarming statistic as it means that even a single episode of financial difficulty can land individuals in money trouble. Hence, if you haven’t started a fund yet, your tax return serves as a great way to do just that! Whether your tax return is $200, $300, or $500+, it’s a smart choice to invest it towards starting your emergency fund.
Invest Towards Furthering Your Education
If you already have a healthy emergency fund and no substantial debt, using the tax refund towards furthering your education is a great option. A degree will not only open doors to new opportunities but also help to increase your earning capacity. Additionally, pursuing an online degree allows you to create a flexible schedule and continue working while studying.
For instance, cyber security is a growing field worldwide, with numerous high-paying roles looking for qualified candidates across the US. When looking for a cyber security degree online, remember to thoroughly research the university to check if they have all the necessary accreditations and licenses.
Make Mortgage Payments
Similar to reducing the repayment burden of your high-interest loans, you can use your tax return to pay off the mortgage(s) as well. Depending on the mortgage, you may be expected to make repayments for the next 10-15 years. However, you can reduce this period by making larger monthly repayments. As a result, not only will you be debt-free faster, but you will pay a lower total mortgage amount as well.
Similarly, if you are looking to purchase a home, your tax return can be used towards your down payments or to cover other home-buying-related expenses such as home inspection, closing costs, and agent fees.
As explored in this article, there are various smart ways to utilize a tax refund to boost your finances for the short and long term. Whether it’s paying off high-interest debt, furthering your education, or starting an emergency fund, take some time to consider the option that works best for you by putting your tax return dollars to work.