Tax Refund Idea: Jumpstart Your Emergency Fund, Pay Down Debt
Plus still treat yourself!
Tax season has begun, which means you might be one of these people getting some extra money from a tax refund.
Receiving extra cash is always fun, and while it may be tempting to spend your money on a splurge or big purchase, you can instead invest that money in your future self.
We’ve got some tips for you on how to use your extra money wisely and have some fun with it as well!
Preparing for your 2024 tax refund
Staying on top of your taxes can relieve future stress and help you get your refund check sooner. Let’s review the important tax dates and info.
Filing deadlines
April 15, 2024, is the deadline for most taxpayers to file their federal and state income taxes. If you filed electronically and expect a refund, you should receive one within 21 days.
States that have different deadline dates include:
Massachusetts: April 17, 2024
Maine: April 17, 2024
Hawaii: April 22, 2024
New Mexico: April 30, 2024 (only for e-returns)
Oklahoma: April 20, 2024 (only for e-returns)
Delaware: April 30, 2024
Iowa: April 30, 2024
Virginia: May 1, 2024
If you need to file an extension, the deadline is also April 15, 2024. Once filed, you’ll have until October 15, 2024, to complete your filing. It’s important to note that even though you file an extension, you’ll still have to make an estimated payment on April 15th.Â
Checking the status of your refund
Once you’ve filed, you can check the status of your refund through the IRS website.
3 Ways to use your refund to start your emergency fund
No matter how good your job is now, layoffs can happen anytime. In 2023, 1.64 million people were laid off in the United States.
Yet, if you have an emergency fund, you can transition through hard times without relying on credit cards or borrowing money from loved ones.
Here are the steps to take to create your safety net.
1. Determine how much you need to save
Start by determining the cost for 3-6 months’ worth of essential living expenses. These expenses typically include housing, food, transportation, medical, and other necessities.Â
Let’s assume your essential living expenses total $2,000 per month. If you’re saving for 3 to 6 months, your savings goals become $6,000 to $12,000.
Don’t panic if that number is bigger than your tax refund. Put what you can towards your emergency fund, then create a plan to save rest of the amount you’ll need.
Begin by setting a goal to save your initial $1,000 towards your emergency fund. Achieving this smaller goal is more manageable and serves as a stepping stone toward accumulating the necessary funds.
You can use an emergency fund calculator if you need further assistance crunching the numbers. Here are some of our favorites.
2. Build savings into your budget
One of the easiest ways to save money is to work saving money into your budget. For instance, you could save 10-15% of your pay or a set amount of $50 every week.
Another simple way to start saving is to start living below your means. For instance, if you usually eat out five days a week, try cooking your meals at home instead. You can put the money you would have used to eat out toward your savings.
3. Automate your finances
Automating your finances means you set up paying your bills and savings deposits to be paid automatically.
For example, you can set up automatic deposits into your emergency savings account through your employer. You can also set up automatic transfers through your bank to ensure you deposit into your emergency fund regularly.
Automating your finances can prevent mishaps and help you save money more efficiently.
5 Ways to use your tax refund to pay off debt
Wouldn’t it be nice to be debt-free or at least make a dent in the amount you owe?
Well, you can with these five strategies for paying off debt with your tax refund.
1. Write down all your debts
Between student loans, credit card debts, and other types of debt, do you know exactly how much you owe?
It’s easier to craft your action plan when you have a clear picture of how much you owe. Here’s what to note when analyzing your debt.
Current outstanding balance
Status of the debt (payment satisfied to date, in deferment, delinquent, etc.)
Type of interest rate (fixed or variable)
Annual interest rate
Minimum monthly payment requirements
Once you’ve gathered all your information, including your monthly minimum payments in your baseline budget.
2. Calculate the daily cost of your debts
Once you have more information on your debts, you can calculate how interest accumulates daily on the outstanding balance of each debt.
For instance, if a $10,000 student loan carries a fixed annual interest rate of 10% and remains in deferment for 180 days, the daily interest accumulation amounts to $2.74.
Over the 180-day period, the accrued interest totals $493.15. If left unpaid before the deferment period concludes, this amount may be added to the principal balance.
Now, you can see that delaying payments is costing you money over time.
When it comes to revolving debts such as credit cards and lines of credit, they follow their own rules for interest accrual and capitalization.
Refer to your loan agreements and credit card’s specific terms and conditions for a better understanding of your interest rates.
3. Choose one priority debt to start
With a clear understanding of your debt, you can choose one debt to target with your tax refund.
Some people choose the snowball method and focus on eliminating their smallest debt first. Others choose the avalanche method, which focuses on paying down the debt with the highest interest rate.
Both techniques are great, but you can also focus on eliminating the debt that bothers you the most.
4. Consider consolidating debt
Consolidating multiple high-interest credit cards into a lower-interest personal loan or a 0% APR credit card can be beneficial. This can be a great option if your tax return is less than expected.
Depending on the amount of your tax refund, you may be able to pay off a significant amount of debt once it’s consolidated.
Before agreeing to a debt consolidation plan, consider any associated fees, how much you’ll save and how long it will take to pay off the total amount. If you find you are not saving money after you run your numbers, it might not be worth doing.
When I felt like I was drowning in debt, I moved to a debt consolidation plan that helped me make one monthly payment with a fixed interest rate. My new debt repayment plan was easier to fit into my budget, and I didn’t have to worry about high interest rates or making multiple payments.
5. Increase your income to help your debt reduction strategy
Use your tax refund to pay off debt and help you continue to make money. You can do this by investing your refund into creating a side hustle.
With a side hustle, you can generate extra income to help you pay off debt faster.
Investing in a side hustle can be:
Signing up for a course to learn a money-making skill
Buying new equipment or tools for your side hustle
Purchasing start-up materials
8 Fun but practical ways to use your tax refund
Now that you’ve been responsible with your money, it’s time to have some fun within reason.
1. Treat yourself to little luxuries
What parts of life do you consider small luxuries? For example, if you enjoy a glass of wine with dinner, use some of your refund check to attend a wine-tasting event to discover new brands.
Something as small as a specialty coffee drink or a decadent dessert can be a reward for a well-completed tax season—and still leave the majority of the money in your savings account.
2. Treat others
Treating others can feel just as good as treating yourself.
You can secretly pay for dinner for the family at the restaurant. Buy a gift card and slip it under the door of a neighbor who you know is going through hard times. Tip extravagantly at the local diner and surprise your waitress, or go out to dinner with your friends and surprise them by paying the bill.
It doesn’t take much to make someone’s day brighter.
3. Go shopping for what you need
You might have noticed that some retailers offer promotions for tax reasons. They want you to use your tax refund with them, and you can take advantage of their discounted rates.
Look for stores that offer special promotions to make your dollars stretch.
4. Pamper yourself
Tax time is stressful for many of us, and you may have a lot of tension to work out once you’ve filed. When the refund comes, use some of it to pay your body back. Treat yourself to a massage and relax those shoulders, or pay for a day at the spa.
5. Make home improvements
A tax refund can be an excellent excuse for taking care of those old or damaged things around the house. Consider the home improvements that can also save you money. For instance, replacing old windows can save you money by reducing the energy wasted. Redoing a kitchen or a bathroom can make your house more functional.
6. Contribute to your hobby
Are you a runner and need some new running shoes? Perhaps you’re a painter and have been dreaming of a new acrylic paint set. Whatever you’re interested in, use your extra money to buy something that will help you continue your hobby.
7. Take a trip
If there’s a vacation that you’ve been putting off, a tax refund may be the excuse you need to book that travel. Depending on your budget, a trip doesn’t have to mean traveling internationally. You can plan a staycation and visit a local beach or town.
A trip will help you break out of your routine and leave you rested and refreshed.
8. Improve your health
Have you considered using your tax refund to improve your health?
Consider using the extra cash to join a gym, buy a new bike, or sign up for a workout program that will help keep you fit. Not only will you have fun, but you'll also get healthier in the process.
Are you ready for tax season? We bet you are. Remember that actions you take now can either help you or hinder you in the future.
Don’t forget, if you need more support with your finances, check out our completely free courses.
