Filing your taxes is tough. Spending your tax refund is not.
Now if you’re like most people, this annual check is typically accompanied by a sigh of relief and an urge to splurge. But before you go crazy, ask yourself:
- What's the best way to spend my tax refund?
- What's the worst way to spend my tax refund?
Here, we help you answer these questions by sharing the biggest tax refund do's and don'ts of 2021 --- especially for young doctors.
Ideally, you should use your tax refund to advance your financial future. Here are a handful of ideas to consider.
Boost your emergency fund
Unfortunately, a huge number of Americans do not have enough money on hand to cover life's unexpected expenses.
An emergency fund is a last-resort safety net to fall back on catches when these unexpected situations arise. The ideal emergency fund should have enough cash to handle at least six months of expenses.
If your emergency fund falls short of this number, consider using your tax refund to give it a boost.
Pay off credit card debt
For young doctors, student loans are the most common concern when it comes to debt. And while you can certainly use your tax refund to accelerate your student loan repayment, tackling credit card debt is an equally viable option.
With a credit card, you’re at risk of accruing debt that will be subject to high interest rates if you don’t pay it on time. If you have fallen behind on credit card payments, use your tax refund to catch up. In fact, you may even be able to purge it all together.
In doing so, be sure to review your options moving forward. Some credit cards cater to the unique needs of medical professionals much better than others.
Explore your options here: Best Credit Cards for Young Professionals
Make home improvements
For homeowners, equity is the name of the game. That's why putting your tax refund toward a home improvement project that increases property value is a sound investment. Some common home improvement projects to consider include:
- Renovating your kitchen.
- Refurbishing your living room.
- Improving the energy efficiency of your home.
Not only do you get to enjoy the modern updates now, but it will also boost your home's resale value in the future. It's a win-win for everyone.
Looking for more ideas? Check out: Smart Home Improvement Ideas
Save for retirement
It feels good when things happen ahead of schedule. Perhaps the ultimate example of this is retirement.
If you haven't saved as much for retirement as you would like, take this opportunity to get back on track. If possible, use your tax refund to max out your retirement plan.
Obviously, the more you save now, the better off you'll be down the road. But making sure you have enough money to cater to your day-to-day expenses for the twenty or more years after your career comes to an end is no small task. Our guide to physician retirement planning can help with that.
Read it here: Physician Retirement Planning Guide
Contribute to a 529 plan
Finally, a subject near-and-dear to all young physicians: the cost of higher education.
As society grapples with solutions to the student loan debt crisis, the cost of higher education is quietly increasing in the background. And it shows no signs of slowing down.
Fortunately, physicians who have a family of their own (or plan to start one) can open a tax-friendly state 529 college savings plan for their children. Using your tax refund to contribute to a 529 plan can help your kids dodge the burden of student loans down the road.
Now that you have a better idea of what you should do with your tax refund, let's discuss what you shouldn't do. Here are three serious mistakes we recommend that you avoid.
Let it sit in your checking account
There are two key disadvantages of putting your tax refund money in your checking account.
- It will enable you to slowly spend the money on things that won’t help you achieve your financial goals, like an impulsive shopping spree.
- It will not earn any interest. If you’re not sure of what to do with your tax refund yet, it’s best to put it in your savings account. That way, you are guaranteed to at least earn some interest.
Of course adding your tax refund is a great use, too. Just make sure you're doing so in the most effective way possible.
Prioritize travel over debt repayment
Young physicians may feel like they missed out on their prime traveling-years while in medical school and training. Because of this, you may be tempted to put your first tax refund as a practicing doctor toward an expensive trip.
While everyone deserves a vacation from time to time, it's not the best use if you're still in debt. It would be more wise to us the lump sum tax refund to pay off your debt first.
Exciting? No. But it'll help you get to a place financially where travel is never a concern again.
Borrow against your tax refund
Tax preparation services offer tax refund anticipation loans (TRAL) based on the tax refund amount a tax payer is expecting.
Theoretically, a TRAL is paid off when the tax preparation service receives your refund check. But what happens if your tax refund comes back less than the amount that was orginally anticipated?
You will be obligated to repay the remaining amount. And that's when TRAL borrowers typically learn that the APR and fees on these types of loans are just shy of robbery.
Needless to say, borrowing against your tax refund is not a wise decision.
When filing your taxes, you should determine how you plan to allocate your tax refund in advance.
Instead of splurging for short-term gratification, use your tax refund to build long-term financial stability. Some options include:
- Boosting your emergency fund.
- Paying off credit card debt.
- Saving for retirement.
- Making home improvements.
- Contributing to a 529 plan.
It's important to remember that what works for one may not work for another. As you long as you spend your tax refund with your future self in mind, you should be just fine.
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Jack is the Head of Content & SEO at LeverageRx, a personal finance company exclusively for doctors.