3 min read
Most of us will get extra money back in our bank accounts during tax season in the form of a tax refund. While this can be used for many things, it's essential to ensure you're not wasting your hard-earned tax refund on items that won't help you grow your wealth over time.
1. Pay off debt
One of the great ways to use your tax refund is to pay off debts. This includes student loans, credit card debt, and even car payments.
Debt is a huge burden and can prevent you from reaching your financial goals. If you're in debt trouble and want to pay it off as soon as possible, think about paying down your bills. I always suggest using the debt snowball method, and attacking your smallest debts first, then working your way up.
Benefits of using a tax return to pay off your debts
Paying off your debts is an excellent way to start an emergency fund, but it can also help you reduce your financial stress and improve your credit score. Here are some reasons why using a tax return as an investment could be beneficial:
It will reduce your financial stress.
Reducing the amount owed will help reduce financial stress when it comes to paying off your debt. When you have less debt and more money in the bank, there are several benefits:
- You'll sleep better at night.
- Your health improves because of reduced stress levels and anxiety about money, which means you may feel healthier overall!
- You'll have more money for things that matter most to you.
You could save money on the interest you owe.
You won't have to pay any more interest if you can settle your debts in full. That's money that can go toward other expenses or even be put into savings.
If you're looking to save money, lowering your debt will help you avoid paying interest and reduce the overall cost of repaying it.
- You could save money on the fees you owe.
You probably pay at least one fee each month if you have a balance on your debts. These fees can add up quickly and take a significant bite out of your budget.
But you won't be charged any additional costs if you can settle your bill in full. That money can go toward other expenses (like groceries) or even be put into savings.
- You can improve your debt-to-income ratio.
If you owe more money than you make that means you have a poor debt-to-income ratio, which can negatively affect your chances of qualifying for a mortgage or renting certain apartments.
Getting your debt to income ratio under control can make a big difference in your overall financial future.
2. Increase your emergency fund
The essential thing you can do with your tax refund is to add to your emergency fund.
Your savings account for unplanned needs is called an emergency fund. It's an essential part of your overall financial plan because it helps you be prepared for any kind of crisis, including health issues or job loss.
If anything unexpected occurs (such as losing your job), you should have a sizeable emergency fund that can pay for three to six months' worth of expenses. This money comes in clutch whenever you hit a financial emergency, and can be the difference between getting back into debt or having peace of mind.
Benefits of having an emergency fund
- More savings, less debt
An emergency fund helps you save more money, pay off debt faster and save for retirement. If you're fortunate enough to work a job with paid time off or sick days, make use of it, these funds can help ensure that your finances are in good shape when those days come around.
- Long-term gains
If your car breaks down and you lack the money to fix it, you could send yourself further into debt trying to fix it. Having an emergency fund will help prevent this from happening.
- A safety net in case of emergencies
If you have an emergency fund, you'll be able to handle unexpected expenses without relying on credit cards or loans. Having a safety net can help relieve stress and worry about how you will pay for something when it comes up.
You'll also be able to pay off debt faster and save more money for the future. If you don't have an emergency fund, it's easier to fall into the trap of using your credit cards or taking out loans when unexpected expenses arise.
- Better credit score
An emergency fund makes you less likely to miss your bills or be late with credit card payments. Having good credit can save you money on interest rates and help you land a job if you need it.
3. Boost your retirement
Now that you've gotten a handle on how to invest your tax refund, it's time to consider how best to use it. One of the most important aspects of investing is saving for retirement.
If there's one thing everyone should know about investing, it's this: Saving for retirement is critical, not just because it will help ensure you're financially stable later in life. It can also enhance your quality of life by giving you more opportunities and options.
The great way to start saving for retirement is by contributing enough money into an IRA (or other qualified account) so that when you do reach retirement age (generally at age 65), the money will be enough for your daily expenses, discretionary spending, as well as emergencies or unexpected events.
4. Fund your education
Additionally, you can utilize your tax refund to pay for your schooling.
If you've got a tax refund, it might be tempting to spend it on buying something frivolous. But instead of blowing through your windfall, consider investing some money in an educational endeavor to help you reach your goals.
You could use some of your tax refunds to fund a bootcamp program or make an investment in yourself by going back to school (or enrolling in classes online) and getting certified as an accountant or financial advisor.
Education is the best way to invest in yourself; it will help you get a better job or advance your career. You can use your tax refunds to pay for school or even cover the cost of student loans if necessary.
Benefits of investing in your education
- You’ll make more money.
This is a no-brainer. When it's time for you to start your job, the more schooling you have, the more money you'll make.
The reason for this is simple: people with more education get better jobs and earn higher salaries than those without it. If you want to increase your earning potential, then investing in yourself is one way.
- You'll open doors to opportunities you didn't have before.
You'll be able to get a better job and pay more money, which means you can afford things like rent, food, and transportation costs. You may even start saving for retirement or other goals like buying a car or paying off student loans.
- You'll improve your chances of advancing in your career.
A better job is attainable. Companies will be more willing to hire and promote you if you're more educated. This makes sense because they want employees who are going places and have the skills necessary for success at their company.
You'll be promoted faster and earn higher salaries than those without degrees or certifications (like certificates), which will help boost your income over time.
- You'll be able to get a higher-paying job.
One of the finest methods to enhance your professional possibilities and raise your earning potential is through education.
People with higher levels of education typically have better job security, which means they have a lower risk of being let go or fired. This means you'll have more opportunities for promotion and pay raises over time.
5. Save for a down payment on a house
The first step in purchasing a home is to start saving for a down payment.
As a general guideline, you should have enough money saved so that buying would be less expensive on a monthly basis than renting. Here are some tips to figure out how much that is:
- Decide how much house you can afford. You want your monthly payment to be less than 25% of your take-home pay.
- Decide on a number. How much is a reasonable down payment? Come up with that number and stick to it.
- Set a monthly savings goal to get you to your ultimate amount.
6. Be generous and donate it
If you have any extra money left over from your tax refund, we recommend donating it to a charitable cause or organization. You can choose from hundreds of organizations, including the American Red Cross, Salvation Army, children's hospitals, and many more.
Donating to charities can be very rewarding, including helping others and improving the communities where you live.
In addition, some companies will match charitable donations made online at the end of each year so that even more money goes directly toward supporting worthy causes.
You now have some suggestions on how to spend your tax refund. Remember, there are many options for investing your money, so you must research and find the one that works best for you.