3 Wise Ways to Use Your Tax Refund

Lump sum payments challenge our financial restraint. Unlike gradual changes, windfalls often cause impulsive spending, which are missed opportunities to improve our financial well-being.

The instant gratification of shopping binges may overpower putting a dent in principal balances or starting to invest.

Tax refund checks are a cash influx that most can relate to. With the average refund totaling near $3,000, several options to improve your personal finances are within easy reach.

Tax Refund

It is helpful to know what options are available to wisely your refund check. This helps you earmark funds before receiving money.

With the average refund totaling near $3,000, several choicesto improve your personal finances are within easy reach.

Whatever the amount, here are money savvy choices for your tax refund:

Begin Investing

You have several choices to start investing for under $100. These include mutual funds, exchange traded funds and direct stock purchase plans (DSPPs). Many folks dismiss starting with such a small amount, but overlook the power of compounding.

What is compounding? In basic terms, your dollars are more valuable today than in the future. This concept underpins inflation and other economic principles.

However, it has everyday value, as well. Mr. Elliott Broidy is an investment manager who often considers compounding when making portfolio decisions. The same leverage is also available to smaller investors.

Best Practice: Be sure to understand investment costs. If opening a brokerage account, ask about breakpoints where balances qualify for reduced commissions or costs. Consider flat free brokers or services that you can grow into as needs become more complex.

Otherwise, no load mutual funds and DSPPs allow you to invest directly without commissions.

Debt Reduction

High interest credit cards can make it difficult to pay more than minimum payments. This prevents your principal balance from being paid down and masks exorbitant interest expense.

Even with expenses trimmed to minimums, a lack of disposable income prevents many consumers from making progress on reducing their debt.

You will enjoy a dollar for dollar return when eliminating debt, as paying off a 13% credit card is equivalent to a 13% investment return.

Best Practice:  For the best results, apply your refund to the most expensive credit card or debt, rather than dividing payments among cards.

Start an Emergency Fund

For how many months could you meet expenses without a primary source of income?

Cash flow issues make it challenging to set aside money for unplanned events. These could include loss of income, medical bills or auto repairs, among others.

Unlike borrowing from retirement accounts, emergency funds do not affect your investments and are interest free.The peace of mind knowing you are more prepared for surprise costs is also invaluable.

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