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Stenger: Tax refunds offer 'ray of light at the end of the tunnel'

Tax refunds offer ‘ray of light at the end of the tunnel’

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While few people look forward to preparing their taxes, tax refunds offer a ray of light at the end of the tunnel. In fact, a 2017 CNBC study found that the average tax refund in Illinois was a little over $2,800 – a satisfying amount of change for many people.

Everyone loves receiving a financial boost, but how you put that money to use is key. Your first inclination might be to go on a shopping spree, but strategically applying the newfound income can make a positive difference for your finances.

Here are a few considerations for how to use your tax refund wisely:

Debt: Anytime you get an influx of unexpected extra funds, it’s prudent to use the funds to help alleviate high-interest debt. Even applying a portion of a tax refund to credit card or student loan debt may provide a much-needed boost to your repayment efforts. Additionally, keep in mind that by paying down debt with cash from a tax refund, you help to preserve money and assets tied up in other important areas of your portfolio (e.g. retirement accounts, college savings funds).

Emergency fund: Emergency funds are crucial when it comes to unexpected life events, such as home or car repairs. Most experts recommend stocking your emergency fund with enough cash to sustain living for three to six months. Yet, according to a recent study from Bankrate, only about 39 percent of Americans have enough money set aside to cover a $1,000 emergency. Anything you can transfer from your tax refund to an emergency fund will only serve to provide an important cash buffer moving forward.

Long-term savings: Whether it’s an IRA, 529 college savings plan or separate savings account for a new car or appliance, consider allocating some of your tax refund to your long-term savings goals. It might not seem like much, but contributing a bit of extra money every so often can help keep your savings goals on track, while providing the accounts with some extra flexibility.

Tax refunds are always a nice surprise around this time of year. Using the funds effectively is a great way to start the spring season on the right financial foot.

Ronald Stenger is a managing director, wealth management and wealth advisor with the wealth management division of Morgan Stanley in Oak Brook.