Are you expecting a tax refund? Here are smart ways to use your refund

By Claudia Mollerup-Madsen

Tax season may not be enjoyed by many, but the thought of receiving a tax refund can put a little spring in your step. Will you be receiving a tax refund this year? If so, you may be one of many pleased Texans. Of all fifty states, Texas had the highest tax refund amount in fiscal year 2017 with an average refund of $3,206.

If you are receiving a tax refund, resist the urge to spend it all at one time on impulsive purchases. While it is a nice treat to receive a check in the mail, a better choice is to put that money towards your financial future.

Pay off debt

Debt can take a toll, not only on your budget and credit score, but mentally as well. If you are carrying credit card debt, you may want to put your tax refund towards paying off some of the balance. High interests can be debilitating to your financial future. Even if you are unable to pay off an entire balance, paying a portion of it will be worth it. If you have more than one card with a balance, begin to pay off the card with the highest APR to give you the most bang for the buck.

Save for emergencies

Only 40 percent of Americans have enough money to cover an emergency expense of $1,000.  That leaves a staggering 60 percent who cannot afford to pay for a trip to the emergency room, car repair, or broken refrigerator. Instead, many Americans would be forced to take actions like charge their credit card or take out a personal loan.  However, if you put your tax refund into an emergency fund, you will be prepared for those unexpected bumps in the road. A good first step is to start with a goal of $1,000. Once you hit $1,000, see if you can continue to grow the fund, saving enough to cover three to six months’ worth of expenses. Make the account accessible, but not too tempting to make impulsive withdrawals.

Build savings and retirement

Another wise way to use your tax refund is to continue to build up your savings or retirement. If you have not maxed out on your retirement contributions this year, you may be interested in putting your refund towards that. The IRS will allow you to contribute $6,000 toward your IRA and $19,000 towards your 401(k) in 2019.  Or, consider putting money toward college savings in a 529 plan or using the refund toward a down payment on a new home.  

There are several smart financial ways to use your tax refund. While buying a new pair of shoes or purchasing tickets to an athletic event are tempting and enjoyable ways to spend your refund, resist that temptation and put the money towards your financial future.

Claudia Mollerup-Madsen is Vice President and Financial Advisor with the Wealth Management Division of Morgan Stanley in Houston.

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