When you get a big influx of funds through a tax refund or an annual bonus at your job, it can feel like you’ve hit the jackpot, and you may feel the temptation to spend it on a big splurge. But if you use some smart financial strategies with those funds, that bonus or refund can pack an even bigger punch and set you on the path to help you reach your financial goals.
Here are some simple tactics you can use to put your windfall to work for you.
When deciding what to do with your tax return or bonus money, consider setting it aside in a savings account to put toward a long-term goal. Though it may be tempting to spend it on something fun like a vacation or new gadget, making meaningful progress toward a bigger long-term goal can bring you a sense of joy too.
Particularly for longer-term goals where the total dollar amount is on the larger side or if your goal is still a few years away, like a down payment on a mortgage or a big event like a wedding. You can maximize your progress toward these goals by putting the funds into savings products that are more likely to offer higher interest rates, like a certificate of deposit (commonly known as a CD) or a money market savings account.
Higher interest rates can really supercharge your bonus or tax refund by adding even more to it than you started with.
Here’s one universal truth about managing your finances: You should expect the unexpected.
Unplanned expenses are bound to happen. They seem to come up at the most inopportune times, and they tend to come with some hefty price tags: a fender bender in the grocery store parking lot, a mishap at your kid’s soccer game that led to a trip to the ER, a bored puppy that ate your couch cushions. Those surprise expenses can really derail your budget, or they might lead you to rely on tapping into credit that you didn’t plan to use.
That’s why having an emergency fund can be one of the best ways to keep your financial goals on the right track.
If you don’t already have some emergency savings built up, a tax refund or bonus can give you a nice boost to get one started. And even better – when you put that refund or bonus into a savings account, you can earn interest on it, helping it grow even more over time.
Using your tax refund or bonus money to pay off debt can also be a smart way to use that extra income.
Whether you’ve got credit card debt that has accrued over time, or you’re looking to pay off your student loans, putting your tax refund or bonus money toward those debts can give you a big jump-start on achieving those goals.
In the long term, you’ll save even more by not having to pay as much interest on that debt, and you’ll also free up some your monthly budget in the future as those monthly payments disappear.
Your employer may allow you to contribute part (or all) of your bonus to your 401(k) directly from your paycheck. There are annual contribution limits to 401(k)s and other types of retirement accounts, so using your windfall to put toward that retirement savings can help you max out your contributions without feeling the impact as much in your day-to-day budget.
The more you contribute to your retirement accounts earlier in life, the more you’ll be able to experience the power of compounding by the time you’re ready to retire.
Of course, there’s nothing wrong with spending part of your tax refund or bonus check – after all, it’s your money and you earned it! While it may not be advised to blow your entire windfall on large or impulse purchases, you may want to spend at least a portion of it on something that’s more of a “want” than a “need,” especially if you’ve been able to put some of it toward your long-term financial goals.
Let’s face it: experiencing a little immediate gratification just might give you the psychological boost you need to stay on the right track when it comes to sticking to those long-term goals.
If you do use some of your tax refund or bonus money to buy something fun, think about spending it on something that could have some long-term financial benefit. For example: If you invest in a high-quality piece of clothing that’s timeless and durable, that can save you money in the long term because you won’t need to replace it as often over time.
The key here, if you do decide to spend part of your bonus or tax refund, is to be thoughtful and strategic about your purchase. Don’t just make a purchase on a whim.
Get inspired to save! Learn how one woman managed to save $10,000 in just one year.
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