April is nearly upon us, and you know what that means: It’s tax season. This year, American taxpayers must file their returns to the IRS by Thursday, April 15. And if you’re like many people, you may be thinking about how you’re going to use your tax refund.
While deciding what to do with the money is a personal decision, the events of the past 12 months -- especially with the coronavirus pandemic -- means that life likely looks different for each of us than it does in a “normal” year. While most financial experts advocate not using your taxes as a savings account, this year in particular, getting a tax refund almost feels like getting free money.
With that in mind, consider a few ways you can use your tax refund in a smart way.
1. Start or Add to an Emergency Fund
Do you have an emergency fund? If not, you’re not alone. According to CNBC, 60% of Americans say a $1,000 emergency would push them into debt. Out of those survey respondents who had faced a financial emergency in the past year, more than 50% stated it had cost them $2,500 or more.
This year has truly taught many of us a lesson about the unpredictable nature of life and uncertain times -- we can’t possibly prepare for everything. But having an emergency fund -- or as we like to call them, “peace of mind” accounts -- can make a huge difference. It may help you achieve peace of mind when it comes to those unpredictable moments that are a common occurrence in the life of a military family.
If you don’t have an emergency fund, it may be a good idea to start one with your tax refund money. If you already have an emergency fund, consider directing all or part of your refund there to bolster it further. There’s no such thing as having too much saved for an emergency.
2. Stash it in Savings
Saving money isn’t only for emergencies. What are you saving for right now? Whether it’s a Thrift Savings Plan retirement account, a down payment on a house or something else. Money from a tax return is a great way to give these accounts a boost.
Don’t forget -- as is the case with any type of savings account, the earlier you start saving, the more opportunity your money has to grow.
While it may be tempting to spend your tax refund in other ways, or even just on living expenses, setting some or all of it aside for savings may help ensure a stronger financial situation in the long term.
3. Pay Down Debts
Credit card debt, or other types of debt: most people are carrying some level of debt. In fact, the average American has about $38,000 in personal debt, excluding their mortgages.
Your financial well-being plays a part in your military career, more so than a civilian counterpart. As you progress in your career and require security clearance reviews as part of that advancement, having your finances on solid ground is key.
Line up your outstanding debts in order from smallest balance to highest. Knocking out some of the smaller balance accounts will give you some early wins and help motivate you to continue on this path!
With interest compounding against you month after month, it may seem hard to break free from the grasp of debt. But you can start by taking small actions to lower that amount, and you can use your tax refund money to pay it down. No matter whether it’s a lot or a little, you can make a difference toward achieving financial freedom from debt.
4. Pay It Forward
In such a tough year, there’s no doubt that many nonprofits and small businesses are truly struggling. There may be causes in your life that you’re passionate about, but you’ve never felt that you were in the right place to contribute financially. Or maybe you’ve always wished you could do more.
Whether it’s donating to a charity that means a lot to you, or going out of your way to support your favorite local business, you could spend part of your tax refund in a way that helps others. Even a small contribution can make a big difference.
Don’t forget: Charitable donations can be written off your taxes for next year. So be sure to keep your receipts.
5. Spend It on You
It’s been a hard year -- that’s for sure. And as the worldwide vaccine rollout continues to pick up speed, it may feel like it’s getting a little bit easier to find the light at the end of the tunnel.
Are you dreaming of visiting friends or family back home? Taking a weekend trip with your spouse? Or just going out for a nice dinner?
Whatever life has looked like for you over the past year, there’s no shame in directing some of your tax refund back to yourself. Whether that’s your vacation fund, or even something that you and your family will enjoy at home. It’s okay to spend some of your tax refund to pay for something you’ll be excited about.
Armed Forces Bank Will Meet You Where You Are
No matter what the past year has looked like for you, Armed Forces Bank is working hard to help you achieve your financial goals. If you’re looking for a partner in your personal finance journey, we provide convenient options for online savings accounts, checking accounts, and more.