It’s not hard to get excited at the possibility of receiving money you weren’t expecting, whether from your yearly tax return or from a possible stimulus check. Of course, the recent fluctuations in the economy quickly have a sobering effect which can leave anyone pondering: What would be a smart thing to do with the money? How can I put it to good use?
In the context of COVID-19, some estimates state that 1 in 5 households have experienced some sort of economic hit related to the health crisis, ranging from a loss of hours to the loss of employment. * Accordingly, many families will likely put those checks and income tax refunds to immediate use paying bills, rent, and living expenses. But even if you’re one of the fortunate ones not to feel an immediate impact of COVID-19 on your wallet, you’re likely going to take money a little more seriously than usual this year.
If you have the flexibility to choose what to do with your tax return or stimulus check, here are three smart ideas to put that money to good use.
1. Pay Off Debt, Especially High Interest Debt
Of all the different smart options, one of the best strategies is simply to address your debt. Paying off higher interest debt—such as credit card debt—is one of the most effective ways to move toward financial freedom.
Even if your tax refund or stimulus check does not fully pay off the debt, you could relieve a lot of stress and burden by taking a chunk out of the principle or paying off the interest. At the very least, it slows the interest from compounding or growing more quickly.
Similarly, while you pay down some of that high interest debt, it’s also a good time to take a pause and consider transferring the balance to a lower interest card. Vantage offers several credit card options that could be an alternative to national bank or store credit cards.
If you have the ability, focusing on outstanding debt is basically the equivalent of reassuring your footing for the future. Your steps toward becoming debt-free are all steps toward your financial freedom and reaching financial goals.
2. Build an Emergency Savings Fund
The speed at which COVID-19 struck the health and economy of the nation reminds us of something fundamental: the unexpected happens.
Since we can’t change that fact of life, we can do our best to plan for it. An emergency savings fund is essential to withstanding setbacks, hiccups, and the unexpected. Depositing your tax refund or stimulus check into an account for an inevitable rainy day in the future is basically an investment in “keeping you on track.”
We recommend having an emergency fund to cover 3 to 6 months of expenses, enough to weather a disaster or loss of employment. But, any emergency savings—no matter the size—is a smart financial move. Any time you can respond to the unexpected without having to fall into debt, you’re inevitably better able to stay on track for your financial goals.
3. Use the Money with Your Future in Mind
Despite any knee-jerk desire to spend the money or splurge, your best bet for a smart money choice is to use your tax refund or stimulus check with your future in mind. If you don’t have to use it for your immediate expenses, you could improve your financial standing. Besides paying down your debt or creating an emergency savings, here are a few future-focused ideas:
- Pay Ahead on Your Mortgage —Prepaying on your mortgage moves you toward homeownership sooner and could mean fewer mortgage payments in the future.
- Fund a Home Improvement —From getting a kitchen upgrade, completing deferred repairs, or even remodeling an out-of-date bathroom, home construction projects act as investments in the value of your home.
- Invest in Your “Human Capital” —Small education costs—such as earning a certificate or additional training—could mean improved earning capacity in the future, so investing in your own skills could be a way to turn that money into stronger a financial position for the future.
- Invest —It may seem scary with all the economic uncertainty as of late, but if you can wait out the storm, it’s still a smart financial move in the long run to invest in your IRA, retirement, or market accounts.
The most important thing to remember is to approach your tax refund or stimulus check as intentionally as possible. Taking the time to think about how that money can move you toward your financial goals, is always the smartest money move.
Your financial needs, goals, and priorities are unique. If you need help planning for your financial future, schedule a phone call with one of our trusted financial coaches for complimentary guidance about your individual situation.
In light of the COVID-19 health crisis, here are a few additional things to keep in mind:
- The Federal Tax Deadline has been moved to: Wednesday, July 15
- 2019 IRA Contribution Deadline has been moved to: Wednesday, July 15
- Find out more about Vantage Credit Union’s response to the COVID-19 situation.
- Vantage is offering an Emergency Relief Loan to assist our members in need.
* Source: NPR Article (March 17, 2020).