As Americans continue to prepare to file their tax returns before the extended July 15 deadline, they should also consider how to best incorporate additional cash flow from a possible tax refund into their financial plan. Should you spend all or part of the tax refund? Or, should you save it? Here are four approaches for you to consider:  
  1. Do you have enough money in your cash reserve account? The COVID-19 pandemic impacted many people’s employment status. Those affected may have already had to dip into emergency cash reserves. Do those savings need to be replenished? Typically, you want to save three to six months’ worth of expenses in a cash reserve account. I suggest establishing a dedicated account for the savings fund, separate from the account you use to pay monthly bills.
  2. Do you have any high interest credit card debt? Though some interest rates are at a historic low, credit cards are still charging high interest rates on customers’ balances. Through my experience working with many clients over the years, I recommend carefully tracking what your credit cards are really charging you. To do so, make a list of all of your credit cards, the current balances and the interest rates on those cards. If a card company seems like they are charging a higher amount of interest than the others, and it has a balance, that would be the best payment to prioritize.
  3. If you have a comfortable amount of savings and a low amount of debt, you could consider adding to your long-term savings. Depending on your income, you could consider investing in a Roth IRA or a deductible IRA. These offer long-term tax deferrals, with the ability to invest in high-quality companies or bonds with long-term growth potential. These accounts are designed to build  retirement savings. If your timeline is more short-term, you could instead consider investing in a taxable account. You will have to pay taxes on the growth, but you can have access to the money quickly and at any point.
  4. If you decide to spend the money on goods or services, think local. Small businesses have been hit hard during this pandemic. If you are going to use part or all of your refund for general shopping, consider buying from the businesses in your local community, if possible. 
If you have not filed your 2019 taxes yet, you have until July 15, 2020 to do so. Making a plan is very important. A CFP® professional can help you determine how a tax refund could benefit your financial plan and goals.