If you’re fortunate enough to receive a refund this tax season, it’s time to think about sensible uses for the extra income so, as Grandpa used to say, “it doesn’t burn a hole in your pocket.”
The smartest thing to do with a little extra money, say experts, is to use it in a way that benefits your budget, generates extra income or helps you achieve financial peace of mind.
This can be accomplished in several ways, including putting the money into a savings account with a competitive interest rate, investing in energy saving improvements for your home or paying down debt. Or, if these options don’t move you, consider donating your refund to a charity of your choice.
“There’s an old saying that money can’t buy happiness, and while this may be true, our research shows that saving money can impact our sense of well-being,” says Diane Morais, Ally Bank deposits and line of business integration executive.
In fact, among those with a savings account, 38 percent of respondents surveyed report feeling extremely or very happy versus 29 percent of those without one, according to a recent Ally Bank survey.
Beyond a savings account, another smart move is to make a deductible IRA contribution. Not only will you earn interest, your contribution may be eligible for a tax deduction. Depending on the size of the refund, you may need to find a bank that has no minimum deposit requirement or monthly maintenance fees that can quickly eat away at your principal. While few people will regret saving money, another wallet-friendly option is to invest your tax refund into money-saving projects, such as energy efficient home improvements. In addition to helping reduce utility costs, you may qualify for a tax credit, called the Residential Energy Efficient Property Credit, on such projects as solar power and wind turbine upgrades.
Also consider paying off credit card debt to save on the interest expense and improve your credit score to help you obtain better terms for big ticket items like a car or a home.
And finally, you may also want to consider making a donation to a charitable cause, which in some instances may reduce your tax liability. Always check with a tax professional if this is a concern
Regardless of how you spend your refund, remember that it’s your hard-earned money, not a windfall – so be sure to use it wisely.