While some taxpayers dread tax time, you couldn’t be one of them. Like millions of others at this time of year, you’re due a refund.
It can feel like Christmas comes early when the government sends you a little cash. But this is no gift for being a good taxpayer all year long. After all, you only get a tax refund if you mistakenly overpay your taxes for the year.
That cash is yours, so you’re going to want to use it wisely.
1. Pay Off Your Debts
Consider sinking your refund into your debts this year. Even if you can’t wipe out your entire personal loan or line of credit balance, you can make a considerable dent in what you owe. This will shorten how long these debts may tie up your budget, and it could even save you interest depending on how your lender applies this payment.
Your lender may not be fond of early payments, so it’s important you check your contract for details. That’s where you’ll find your lender’s payment policies.
A line of credit lender like Fora encourages its borrowers to pay off their balance in full. However, some personal loan lenders have other ideas. They may apply a fee for any payment that goes against your contract, even if it’s to pay them more money.
You’ll have to do some math to see if paying off your debt early is worth the fee.
What if You Have a Lot of Debt?
Like many people these days, you probably have more than one personal loan or line of credit. When you aren’t sure where to start, the snowball and avalanche methods offer some guidance.
- The snowball method funnels your windfall towards high-interest debt to control how much interest you accrue.
- The avalanche method, on the other hand, targets your smallest balance so that you can wipe out debt faster.
Weigh the pros and cons of each method to help you decide which personal loan or line of credit to pay off first.
2. Create or Refill Your Emergency Fund
Why do people take out loans? It’s usually because they don’t have the savings, they need to handle surprise repairs or urgent purchases.
Maybe you put an unexpected car repair on a line of creditor took out an online loan to afford emergency vet care. While you may never be able to avoid emergencies like these, savings can help you be better prepared.
A well-stocked emergency fund should contain three to six months of living expenses. That’s an enormous goal that can take a long time if you rely on small, monthly contributions. However, you can reach this target faster by sinking your refund into this account.
Where Should You Save Your Emergency Fund?
The best place you can keep your savings is somewhere safe, where you won’t be tempted to spend it or penalized if you withdraw from it. After all, your savings must be available in an emergency, so you can’t wait for withdrawal delays or minimum balance penalties.
As an added bonus, look for an account that offers a high interest rate. This way, your savings will grow faster the longer you have it.
The Takeaway:
Your refund can help you make big financial moves by paying off debt or building your emergency fund. Consider these options before you spend your refund on something fun.