This post was written by Callie Marshall, a communication specialist at American Student Assistance®. Check out more from Callie here.
I vaguely remember getting my first tax refund in college. I’m pretty sure most of it went to a new wardrobe and a few pizza nights with friends. I was paying for college mostly with student loans and had never had that much money on hand in my life. So, why not enjoy my sudden wealth?
I’d find out why 4 years later.
The first student loan I paid off was small, about the size of that first tax refund. It lowered my monthly payments by about $20 a month—but it took me several months to pay off. Avoiding that one loan, by itself, could have saved me hundreds of dollars in interest.
Don’t get me wrong; using a little bit of that refund money for fun wasn’t a bad thing. However, I could have spent it on better things—like my loans or other long-term goals. So, if you’re coming into money from a tax refund or anything else, here are four smart things to do with it.
1. Pay Down Your Student Loans (Even If You Don’t Have To)
Maybe you’re not required to pay anything on your student loans right now. While it’d be great to just not worry about it, interest can really add up on those. If it capitalizes onto your principal balance, you’ll wind up paying interest on your interest!
Got subsidized loans? Even if the interest isn’t accruing on those right now, a lower student loan balance will mean lower monthly payments later on. You could save hundreds of dollars by making payments early.
(Editor’s note: If you put extra money toward your loans, request that your servicer apply it toward the principal of your loan with the highest interest rate. If your loans all have the same rate, apply to it to the principal of your unsubsidized loans first.)
2. Start An Emergency Fund
Kudos if you already have some kind of an emergency fund—but could you add more to it?
The ideal emergency fund covers 3-6 months of your basic living expenses. Coincidentally, that’s a good amount for replacing or repairing a car, and it could go a long way toward offsetting other catastrophes.
This is a great investment because you will definitely be glad to have this money when you need it.
3. Put It Toward Next Semester
Student loans are great, but you should use them as sparingly as possible. At the end of the day, money you don’t borrow is money you don’t have to pay back. A lower balance on your student loans means lower monthly payments in the future, and you’ll probably save a ton on interest!
4. Save Toward A Goal
Think ahead. For example, are you planning to move soon or even in a few years? Many college grads relocate to get the jobs they want—but moving is expensive. Landlords often require first and last month’s rent, as well as a security deposit. Not to mention, the cost of travel and transporting your stuff!
How you manage your tax refunds is a part of how you manage your finances in general. Suddenly having that kind of money to do whatever I wanted with felt freeing at the time, but it actually held me down later. Avoid the same fate by thinking before you blow extra income on an emotional decision you may regret later.
Have some awesome ideas for maximizing this year’s tax return? Share them with us!