Tax refunds feel exciting. Whether you receive a smaller or bigger tax refund, using the money in a smart way puts you ahead financially. You might think about using the money for a much-needed retail therapy session or to help with a new major purchase. Have you ever thought about using the money to invest in yourself and your financial future, though?
In this post, our team shares expert takes on making the most of your tax refund. Here are 7 ideas for what you can do with your tax refund money.
Saving in an emergency fund creates a safety net for you and your family. Sometimes bad things happen to good people: losing a job, facing an unexpected medical expense, dealing with expensive car or home repairs, etc. When you find yourself in an unfortunate situation, having a little extra dough saved up goes a long way. Plus, you will not need to rely on expensive credit cards or payday loans.
The key to starting a strong emergency fund is saving enough cash. Using the money from your tax refund can help you reach your goal amount. To learn more about emergency funds, check out our prior post here.
Debt can be a powerful tool but needs to be kept in balance. Student loans can be expensive, but an education can open new doors for higher income and greater career opportunities. An auto loan can help you commute to your dream job while still allowing you to live in an affordable area in your city. Responsible use of rewards credit cards can unlock a dream vacation via airline miles. Still, a smart money move is always keeping your debt in check.
A tax refund is a great opportunity to pay down debt. Start by evaluating how much you can pay off. If you can, pay down everything to $0. If that is not realistic, start by putting any extra money toward your smallest amounts and highest interest rate accounts. Then, make the minimum payments on your remaining debts. Repeat this process each time you find a little extra cash in your monthly budget. This method helps you lower your debts to reduce interest charges so that you can tackle smaller payments account by account.
The more you save and the earlier you save, the greater your opportunities will be for compounding interest and generating wealth. It is never too early to start planning for your retirement. Topping off your retirements accounts, like an IRA or 401(k), can be one of the most rewarding money moves to make with your refund.
Every saver should balance short-term and long-term goals. Using your tax refund to invest in your retirement accounts will generate investing returns over a long period of time. For example - making some assumptions about inflation and your income - investing an annual $1,200 refund that earns a reasonable 5% per year could generate $120,000 or more over 30 years.
Investing in your core skill set and academic credentials can help you achieve your career goals. Whether you want to switch jobs or pursue a higher level of mastery in your current field, you can use your tax refund dollars to level up. For example, you might want to attend a graduate school program or maybe you want to take an online course to learn a technical skill. If you increase your earning potential or the likelihood that you might receive a bonus at work, then the money spent now could be a great investment toward a much larger financial reward later.
After topping off your retirement accounts, consider what other long-term investments you would like to make. You can grow your money and even build passive income to make money without doing any extra work. Consider taking some time to read up on the stock market, real estate, mutual funds, savings bonds, and other opportunities.
Take moment to decide if you want to invest actively or not. Some investors prefer to use automatic investing apps. These apps can help you build a diversified portfolio without any extra work. Alternatively, more experience investors might prefer the flexibility and control offered by a traditional online brokerage. If you are just getting started, don’t hesitate to reach out to a licensed financial advisor. Often, the best advisors will offer a free first meeting so that you can feel out the service before signing up.
Have you always dreamed of bringing your own business ideas to life? Maybe the extra cash from your tax refund is the boost you needed to get started. You can think of your tax refund as your seed investment. The money from your refund could help you buy materials, pay for advertising, hire a website contractor, and more. When you invest in cash flow producing opportunities, like a business, you invest in securing a better financial future for yourself.
A tax refund is a great opportunity to pay it forward. If there is a charitable foundation or nonprofit that is close to your heart, then you could consider a donation. This is a great option especially if you feel secure your personal financial situation. If you decide to donate, make sure that you get a receipt. Not only will you make an impact for others, but you could even deduct the donation off of your next tax return if you itemize deductions.