This is the time of year when many people might be getting a tax refund. While there are pros and cons to using your tax refund as forced savings, many people wonder what are some of the best ways to use your tax refund. When you have a regular monthly budget, it can be challenging to figure out the best things to do with a relatively large check, especially if it’s unexpected or larger than your typical income amounts.
In addition to the tax refund that you might be expecting, many people have received or may be receiving a stimulus check from the government. The same rules apply with a stimulus check since it’s likely to be unexpected money that you include in your regular budget. Here are 5 things that you can do with a large, one-time payment
Create a Budget
The first thing you should do is make sure that you have a budget. You don’t necessarily want to include this one-time income into your budget (since it’s unlikely to repeat), but it’s a good idea to make sure that you have a decent idea of where your money is going. Remember that a budget is just a tool to keep you from spending money on the things that aren’t important to you. That way you have plenty of money left over to spend on the things that ARE important to you.
Start or Add to an Emergency Fund
If you don’t have an emergency fund already, that should probably be the first thing that you do with your one-time payment. An emergency fund is an important part of a healthy financial life. One important thing to remember is to keep your emergency fund money SEPARATE from the rest of your money. Check out our list of best savings accounts to find a good account for you.
If you already have at least $1,000 in your emergency fund, you might consider adding to your emergency fund. $1,000 is a good starting amount for an emergency fund, but it won’t be enough to cover more than an occasional expense. Ideally, you should work towards having three to six months of living expenses in an emergency fund. Your tax refund or stimulus check can be a great way to start making that happen.
Pay Down Debt
Another great option for your one-time income is to pay down your debt. There are a variety of different debt payment strategies, so decide what makes sense for you. With the debt snowball, you order your debts by the smallest amount first. Then you pay them off in order, successively taking each paid-off debt’s monthly payment and applying it to the next smallest debt. The debt avalanche starts by paying off your debt with the highest interest rate. That will help to minimize the total amount of interest that you pay. In practice, the difference between strategies is not that important — the most important thing is to pick a strategy that you can stick with.
Start a Sinking Fund for a Long-Term Goal
Another great option for a one-time payment is creating a sinking fund. A sinking fund is a special kind of savings account that is set aside for a specific and particular goal. An example might be to save for a down payment for a house. Let’s say that you identify that you’ll need $25,000 for your down payment and can contribute $500 / month towards your sinking fund.
To start a sinking fund, it can be as easy as starting up a new savings account and funding it with some money. With our down payment example, it will take 50 months with no additional deposits. But once you decide your most important goal, you can start directing all of your extra money towards meeting your goal. Side hustles, credit card rewards, and one-time payments can be a great way to meet your financial goal with a sinking fund.
Invest in Yourself
Finally, take some time to invest in yourself. This could be taking additional training for your career, looking for a new job, or starting a business. It could even be something as a reward for hard work or accomplishments in other areas. The important part of investing in yourself is to make a plan for it. Without a plan, you’re likely to find that this large, one-time payment has evaporated within a couple of weeks or months. Putting a plan in place is a great way to make your money work for you and position yourself for future financial success.