Ah, tax refund season. Nothing better than getting free money back into your wallet, right? Too bad nothing ever really comes for free in this world; you technically already earned that money last year, remember? But now your bank account has some extra padding, and you've got some decisions to make. Will you splurge, spend or save your precious returned revenue?
With the help of some expert insights from finance expert Kevin Gallegos of Freedom Financial Network, Brian Ford, on Up financial wellbeing executive at SunTrust Bank, Sarah Berger of Bankrate.com and Jeremy Takle, Managing Director of Barclays U.S., we found out just what your new money can really do.
1. Treat Yourself
There's no harm in reaping the benefits of your hard work every now and then. Maybe your refund is the perfect excuse to finally get that handbag you've been eyeing forever or that perfume you know you just need. Ford recommends using the 50/20/30 formula, where you decrease debt with 50 percent, save 20 percent and spend 30 percent. Now those are numbers we understand!
2. Pay Your Bills, Bills, Bills
This one's common sense, right? If you've got water and electric bills to pay, put your refund to good use. That new makeup palette or throw pillow set will have to wait.
3. Give Credit Where It's Due
While nothing can match the utter satisfaction of swiping of your personal plastic, you really should pay off any withstanding credit card debt according to Gallegos. Not only will this improve your credit score, but it also means your interest rates won't be sky high in 20 years!
4. Lean In On Your Loans
Those looming figures don't have to be so intimidating if you're willing to fork over the cash. While student loans typically have low interest rates according to Ford, there's no harm in contributing some of your return to your loans. After all, every little bit helps if you want to be debt-free!
5. It's An Emergency
If you don't already have an emergency fund up and running, now is the time to start one. Whether it's for an unexpected car repair or when you need an extra cushion here and there, you should have some moolah reserved for such purposes. Takle says, "Whatever your current income, having the equivalent of 3-6 months' worth of expenditure readily available can take you from a critical situation to a comfortable one should you need it." Time to get saving! Ford says to have at least $2000 in this fund at all times.
6. Save It For Later
Even if you have an emergency savings, you can never save too much, right? Especially if you're just starting out your professional career, the importance of saving your hard earned money cannot be understated. Berger assures her clients there's no harm in saving too much of your return, as you can always withdraw a little later if you're so inclined. Ford recommends everyone to save at least half of their refund to start with before making other purchases.
7. Don't Blow It
That so-called free money should not be impulsively spent on a Sephora stop or any sort of shopping spree! It can really be tempting to drop your hard-earned cash on something you've wanted for a while, but if you start practicing money-saving habits now, you won't be running straight to the mall with your return.
8. Give Back
Everyone spends their money a little differently, and if giving back to society is near and dear to your heart, why not return the love with some of your return? Some charities and nonprofits offer tax benefits when you donate to their causes, so there is some monetary advantage to being generous!
9. Kick Up Your 401k
No matter your age, you should always plan for your eventual retirement (wishful thinking, right?). Gallegos recommends putting as much money into your 401k as possible, especially if your company matches your funds (now THAT'S free money!). Ford typically advises clients who already are participating in a 401k to contribute more to it than they would to their student loans, but it's ultimately up to you.
No matter what you choose to do with your tax refund, just be sure to spend and save wisely. And when next year rolls around, you'll know exactly how to handle that refund deposit.