Getting your tax refund is always a relief, and it’s a way to treat yourself more than usual. You may have had the habit of spending most of it at once.
On the other end, you might not have an idea of how to use it this year. Using your tax refund to set you up for the long term is one of the best moves you can make.
The issue is that most people don’t know how to use their refund to fuel future financial growth. Here are some wise things you can do that will make a difference in the future.
1. Pay off Your Debt
What better way to use a tax refund than to eliminate all your outstanding debt? While it may not seem like an impactful action, you’re allowing yourself to have more financial freedom.
The thing about debt is that it compounds. For example, credit cards have an interest rate that compounds.
You’re not paying the interest rate. If you do not zero your debt, it multiplies on top of your remaining balance.
When it compounds, you can spiral into a problem quickly. By paying off your debt, you could save thousands for other endeavors.
If you’re working on much larger debt like a mortgage, begin crafting a plan to pay it. See how much your tax refund affects your payments.
Getting a huge chunk off its principal will also lower your monthly payments significantly. Just don’t forget to tell your lender your plan.
2. Build an Emergency Fund
Your emergency fund is a safety net protecting your finances if you encounter an unexpected cost. Many experts recommend a year’s worth of your salary ready for use.
While it may not be feasible for everyone, start building a couple of months’ worth of funds. That way, when an emergency arrives, you won’t have to go to zero or get into debt.
Many things can destroy your current financial situation if you don’t have something for emergencies. Some examples include:
- Accidents
- Illnesses
- Job Loss
- Catastrophic events
- Economic downturn
Your emergency fund will help you live with all the essentials for months as you recover. If you’ve lost your job, you can still feed yourself and pay bills while looking for another opportunity.
3. Put It Towards a Goal
You may be saving for something big in the future. It can be anything from a high-valued purchase to vacations and even investments.
You can use your tax refund to accelerate that goal. It could mean that you could be years ahead of your savings if you commit most, if not all, of the tax refund.
If you don’t want to put it all in one basket, you can spread it around several of them. You can put a chunk of money for a house down payment while making sure you can buy some of the things you desire.
“Weigh your goals and priorities to see where your tax refund fits better.”
4. Let It Grow Your Retirement Fund
You’d eventually want to stop working and enjoy the latter years of your life. If that is your desire, you’d have to begin contributing to a retirement account as early as possible.
“The earlier you can get it, the higher growth it can attain.”
However, that is not the only path available. By using your tax refund, you can maximize your contributions for the year and then set aside the rest.
A maximum contribution will mean more money will compound in the following years.
A retirement fund acts as an extra income source combined with other benefits. With it, social security, pensions, and investments.
It could mean you’d never have to work again when you hit retirement age.
There are two ways main retirement plans will benefit from your contribution. You can set most of these up with your employer but self-contributions work.
Some even offer to match your contributions to a limit. These two options are:
The two differ mainly in how they deal with tax. A 401k does not take any tax now but will do so later when you get the money.
A Roth IRA has you paying the tax now so that you won’t have to deal with it in the future. Both can be a good option, depending on the current circumstances.
If you’re at a low tax bracket now, opting for a Roth IRA can be beneficial if you’re expecting to go up in the future. If you’re at a high tax bracket now, then a 401k may be the better option if you foresee a lower tax in your retirement age.
5. Fund Your Necessities Early
Every household has annual costs they need to answer. If you use your tax refund to pay for them, the usual money you save is now free for other things.
It’s a boost that will give you more financial options. Things you can use it on include:
- Renovation
- Medical bills
- Tuition
- Car repairs
- Insurance payments
Your tax refund will be a significant amount that’s unlike your usual pocket money. The best way to use them is to avoid spending it on things you can easily afford with your income.
“You can bypass headaches and frustration by paying your annual costs right away.”
6. Build an Education Account
Another cost you need to save for is your child’s education fund. Student loan debt is one of the liabilities someone can acquire at a young age.
Even with the possibility of loan forgiveness, it doesn’t change the need for college education money. Like retirement, you can plant the seeds for the future by putting your tax refund into a 529 or an education savings account.
Like retirement funds, these plans often have limits for annual contributions. You can set up a plan and start making large payments for each tax refund to fuel the fire fast.
Providing your child with free education can be a fulfilling experience. Education plans also grow tax-free.
7. Place it In Investments
If you want to grow your wealth over time, then placing that extra money on investments is one of the best ways to do it. You’re letting your money work for you, providing you returns in the long run.
Markets are known to go higher over time, even with the occasional downturn. The longer you stay in the market, the better your chances.
There are many places where you can place your money to appreciate. Here are some of the things you may want to consider:
- Stocks
- Real Estate
- Precious metals
- Commodities
- Cryptocurrencies
- Collectibles
Each of these has a distinct market. Learning more can help you succeed in the long run. For example, if you know the best times to enter, you’ll avoid much of the drawdown that many investors experience.
A $3000 tax refund that grows on an average of 10% each year can give back around $300. Some markets have higher returns but more risk involved.
Over time, you’ll get more money, thanks to compounding. In the example above, your $3300 the following year will net a higher amount at $330.
The money continues to grow as it adds on top of itself. You can then leave it for years until you need to spend it. Either way, they can provide you with an alternate source of income given enough time.
8. Invest in Yourself
If you want to make the most out of opportunities in modern times, it pays to buy yourself the skills and education you need. For example, demands for computer, technology, and healthcare skills are at a high right now.
“If you were to learn something, you could get into high-demand jobs that provide you with a boost in income.”
You are the biggest income-producing asset you own. With enough skills and experience, you’re sure to bring in the most money possible, which you can then feed to your other financial goals.
Like any investment, putting money to improve yourself will pay you years down the road.
9. Work on Your Home
Using the money for a home fix or upgrade will be worth it. It’s the space where you spend the most time. Not only that, there are many ways to make money from your investments if you choose to sell them later.
“You can add a new space which you can then use for rentals, giving you a passive income opportunity.”
Alternatively, adding functional features that sell well on the market will give your home a boost. That could easily double or triple the money you invest in it.
Combine that with the fact that house value tends to increase, you have a recipe for a long-term money basket you can withdraw when the time is right.
10. Buying Convenience
While money is a precious commodity, there is another one that most people overlook. Investing money to have more time on your hands is one of the best things you can do with your tax refund.
“Many people in the world have more than enough money, but not enough time to enjoy it.”
It can be as simple as repairing your car to drive smoother or fixing old appliances at home. You can replace them to save on energy costs or add something to your life that cuts time on chores.
If you make this type of purchase, you’re also improving your chances of retaining your peace.
Stress is a problem that all people deal with, but there are ways where you can manage or mitigate them altogether. Even doctors understand that it can contribute to health problems if you’re not careful.
Spending some of that tax refund to make you happier and less stressed will be worth it. Sometimes it pays to take care of yourself.
11. Give Money to Charity
If you have a cause that’s close to your heart, then the refund will provide you the opportunity to make an impact. It’s a sum that can help multiple people.
If you’re donating to world hunger programs, you ensure that many people get the meals they need.
Not only does charity feel good, but it can also assist with your financial situation. As long as you keep documentation of your giving, you can use it to lessen taxes for the following year.
12. Start a Business
The tax refund is big enough, and it may be enough to become the starting capital for a business. That way, you won’t have to take out a large loan that will only affect your future finances.
If your business idea seems like an expensive ordeal, then start with something small. There are many lucrative ventures today that do not need much capital.
For example, if you wanted to sell products in the past, you’ll have to set up a shop at the town center. With how powerful online shopping is today, you can even start selling at the comfort of your home.
To improve your chances of success, you can research trends and businesses making money today. Try to find space or a niche that those businesses do not cover.
Another alternative is to work on something close to your heart. You’ll find that you’ll put in much effort for something you’re passionate about.
Final Thoughts
There are multiple ways you can use your tax refund for a benefit. You don’t even have to commit its entirety to one thing. Choose several that you like and allocate money for them.
If you want to pursue one of these options but need help, maybe you need professional assistance. 121 Financial Credit Union are the experts who can help you plan ahead of time.
Not only are they certified financial professionals, but they are also in it for your best interest. A credit union serves its clients first before themselves.
Contact us today and ask about the option you want to take. We’ll be happy to assist you and see what options can work for your tax refund.