With the holiday season behind us, the year moves into a new period that most Americans don’t get as excited about: tax season. From now through mid-April, millions of Americans will file their taxes.
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The one big perk of this season for some is receiving a nice tax refund; these experts offered advice on deciding how to spend your extra funds.
Don’t Waste It
When you suddenly have a big chunk of money, putting it toward a new smart gadget, that vacation to Florida you’ve been wanting or concert tickets might be tempting. However, most finance experts advise against this type of spending.
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Jaspreet Singh, the host of YouTube’s Minority Mindset channel, strongly discourages blowing your tax refund on something you don’t need. He explains that your tax refund isn’t some bonus you earned but a sort of forced savings. Since you overpaid the IRS, it’s been holding onto your money before giving it back. You should spend it on something useful instead of fun.
Pay Off Debt
While it’s not the most exciting thing to do with a tax return, paying down your debts might be the most practical. Dave Ramsey, the founder of Ramsey Solutions, is a fan of using your tax refund to live a less stressful life and pay off credit card balances, student loans or any other debts you’ve accumulated.
Many people fall into the trap of making the minimum payments on their debts and barely reducing the principal amount. Putting your entire tax return toward your debt is an excellent way to make a big dent.
Ramsey suggests using one of two methods to tackle your debts instead of going at it haphazardly. The snowball method requires you to line up your debts from largest to smallest and then put all your extra money toward the smallest until you’ve paid it off. Then, you pay more toward the next smallest and build momentum as you watch each debt disappear. Similarly, the avalanche method has you line up your debts by interest rates and pay off the highest rate first. By doing this, you’ll accrue less interest in the long run and save more or have more money to pay down your debt faster.
Start an Emergency Fund
With all of the bills and obligations of day-to-day life, it can be hard to set aside savings. Another suggestion from Ramsey is to take the lump sum you get from your tax return and save it in case of an emergency.
Emergency funds are considerable savings you draw from when you have unexpected medical expenses, home repairs or other critical situations requiring cash. Rachel Cruze, Ramsey’s daughter and co-host of the Ramsey show, suggests saving up an emergency fund that amounts to three to six months of income so you can tackle most unexpected financial challenges. While this may be a lot, your tax refund will be a great start or addition to the fund.
Invest In Your Roth IRA
Another good use of your tax refund is to invest it. Suze Orman, a podcast host and personal finance expert, thinks this is exactly what you should do. However, she doesn’t suggest just putting your money into the stock market — she suggests you put it into a Roth IRA.
A Roth IRA is a retirement account where you deposit after-tax dollars. Your investment can grow in the account until you withdraw tax-free in retirement. Because the IRS has already taxed the money you receive in your tax return, it can go straight into a Roth IRA.
Don’t Get a Tax Refund
In line with what Singh said about overpaying the IRS, many experts agree you should avoid getting a tax refund. George Kamel, a frequent co-host of Ramsey Solutions, echoes these sentiments and urges you to work with your HR department to change your tax withholdings.
Specifically, Kamel says if your tax refund is over $500, you should pay less in monthly taxes. Instead of paying more in taxes and letting the IRS hold onto your money for most of the year, you could earn interest. Investing that income in the stock market or putting it into a high-yield savings account will help you gain more over the year.
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This article originally appeared on GOBankingRates.com: Suze Orman, Dave Ramsey and Other Experts on What You Should Do With Your Tax Refund
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