Whether your tax refund is big or small this year, it’s tempting to splurge with that modest windfall. These five ideas can help you keep the “fun” in your refund while being mostly responsible and strategic with your money (we’ll call this fun-sponsible).
The key to fun-sponsible is using a small portion-say 10%-for fun. Then use the rest to get ahead on one of your financial goals. Last year’s average refund, according to the IRS, was $2,549. The fun portion of that could be about $255. The other 90%-$2,294-can be your responsible money.
1. Have a tax-themed date night/debt night.
Fun: How long has it been since you and the significant other had a date night? Use your fun money to do something special for yourselves. A small refund may mean takeout from your favorite local bistro, or a bigger one can cover a night away at a nearby vacation rental.
Responsible: Log in together and use your bank’s bill-pay function to tackle debt. Regardless of how much you got back, focus on paying down a higher-interest debt, rather than spreading the money around. “When you pay off a higher-interest-rate debt, it generally gives you more long-term purchasing power,” says Heather Winston, assistant director of financial advice and planning at Principal ® . Maybe your focus is credit cards or student loans. Just take a chunk out of a high-interest monster together for some financial breathing room.
2. Create an emergency fund for a rainy day.
Fun: By the time Tax Day rolls around, spring will have sprung, and all those great new raincoats will probably be on sale. And rain or shine, you’re probably itching to spend time outdoors. Use your fun money to pick up a brand-new waterproof jacket. If your refund was fun-sized this year, maybe a new umbrella is your thing.
Responsible: Many financial experts agree that you should have an emergency fund to help pay for unexpected expenses; three to six months of regular expenses is a great target. But don’t worry: “You don’t have to fully fund your emergency account all at once,” Winston says. “Set a small, attainable amount that you can contribute consistently, and then use your refund toward that.”
3. Treat your (future) self by opening an IRA.
Fun: Want to get a grip on calligraphy? Maybe a knitting class to stitch together your Etsy dream? Or a virtual vegetarian cooking course to heat up those culinary skills? Enroll to learn something new that’ll bring you pleasure for years to come.
Responsible: While you’re investing in yourself, don’t forget about the Future You. One option is to use the rest of your tax refund to contribute to a traditional IRA or a Roth IRA. Your traditional IRA contribution taxable income. And by the time you retire, that $2,294 could turn into an extra $13,000 in your IRA. 1 “Your future self will thank you,” Winston says.
Bonus responsible item: You could also invest in the next generation. If you’ve got kids, start or contribute to a Custodial Roth IRA, a custodial Brokerage account, or 529 plan to help with their future college expenses.
4. Cover your bases with life insurance.
Fun: Springtime opens baseball season. What better way to use your re-fun-d than by heading to the ballpark? From the major league to local teams, many organizations are planning for socially distant seating throughout the 2021 season.
Responsible: Help take care of the people you love by using your refund to fill in any life insurance gaps. Thinking about what would happen if you’re not around is not fun, but it ount of protection in place, for their future and for your own anxieties. Life insurance is available for nearly every need and budget. (And the earlier you get it, the less expensive it is.)
5. Put your tax refund to good use in your community.
Fun-sponsible all in one: While it’s exciting (and important) to treat yourself and get ahead on your own finances, maybe you’re sitting well and looking to help others not as fortunate. “The past year https://paydayloansohio.net/cities/gambier/ has been challenging for everyone,” Winston says. “Consider using your refund to support a local small business. Helping others-in big or small ways-can be incredibly rewarding.”