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How to spend your tax refund

Apr 13, 2021
Empower Insights

Use your tax return to build financial stability — and treat yourself, too

If you’re getting a tax refund this year and are fortunate enough to have your essentials covered, you might be contemplating all the ways you could spend that money. Treating yourself to something fun is one way to spend your tax refund, but you might also want to consider using your refund to get ahead financially.

Here are four ways to use your tax refund as a tool for investing in your future.

1. Pay off high-interest debt
Credit cards often carry high interest rates. With a lot of interest compounding against you each month, it can be difficult to make your credit card payments and still put money away for retirement or an emergency fund.

Consider using your tax refund to wipe out your high-interest debt — then avoid building up more debt than you can pay off in full each month. If your refund isn’t enough to fully eliminate your balance, consider using it as a way to kick-start a debt-payoff plan.

2. Contribute to an emergency fund
Financial professionals recommend saving for an emergency fund that can cover about three to six months of expenses. An emergency fund helps protect you from financial hardship in the face of unexpected expenses, like a large medical bill or a job loss.

Your tax refund may not be enough to fully fund an emergency savings account, but you can still use it as a jumping-off point. Even just a few hundred dollars to start can give you some peace of mind knowing you have the ability to cover financial hiccups, like car repairs or a temporary reduction in work hours. 

3. Save for retirement
Putting your tax refund in a retirement savings account can pay off in the long run as your savings benefit from potential market growth. In addition, any investment returns you earn will produce earnings of their own — a phenomenon known as compounding that can have a major impact on your long-term savings. While you can’t contribute your refund directly to a 401(k), you can use the cash to pay for regular expenses and bump up your 401(k) contributions through work. Or you can contribute to an IRA. (In 2021, you can contribute up to $6,000 to an IRA; $7,000 if you’re 50 or older.)

4. Treat yourself
Paying down high-interest debt, building an emergency fund and saving for retirement are all ways you can use your tax refund to build financial stability, but you don’t necessarily need to use your entire return for these goals. You can set aside a little to reward yourself, too. Treat yourself to something you wouldn’t normally buy or spend some of your refund on home improvements that will brighten your day.

Keep in mind that getting a refund means you’re giving the government an interest-free loan. Talk to your employer about adjusting your withholding if you’d prefer to get that money in your pocket each pay period rather than as a lump sum when you file your taxes. 

Continue laying the groundwork for your financial future with an Empower Investment Account

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