Using the banking app on your phone, you see that your tax refund has finally been deposited into your checking account. You’ve been thinking of all the ways you can treat yourself, from that new set of clothes to the spa day you’ve had your heart set on.
“You deserve it,” you tell yourself. But that same voice is also telling you to pump the brakes and spend this money wisely.
You have numerous options when it comes to spending your tax refund. Some can provide you with short-term pleasure (like an expensive meal out), while others are more long-term in nature (think savings account). Here are seven ways you can use your tax refund wisely that will provide you with lasting benefits.
1. Reduce your debt
U.S. households carry an average credit card balance of $5,700. The interest rates we pay on this debt averages right at 16%. These numbers keep many people awake nights, thanks to the financial and psychological stress debt brings with it.
Outside of making a final mortgage payment, few financial events in our lives give us as much pleasure as a credit card statement showing a zero balance. Consider using your tax refund to pay off as much of your credit card balance as you can. It quite likely carries the highest interest rate you’re paying and eliminating it will give you peace of mind and quite possibly improve your credit score.
If you are fortunate enough not to have credit card debt, you may have student loans or car loans on which you make monthly payments. Make sure there are no pre-payment penalties and apply your refund to one of these other payments you may be making. You’ll be reducing your debt and increasing your net worth.
2. Increase your emergency fund
There’s never a good time for the transmission in your car to fail you, or for your air conditioning system to conk out. But it’s a terrible time when you don’t have funds set aside for unforeseen events that happen to all of us. Not being prepared for emergencies often results in removing our credit cards from our wallets, and our spirits plunging as we rack up new debt.
Just about every financial planner will advise you to set aside 3-6 months of income in case of an emergency. If you’ve already established your emergency fund, increase it by transferring your tax refund over to it. If you haven’t begun a fund yet, open up (and fund) a savings account at your bank or credit union for the sole purpose of using the money in the account for a genuine financial emergency.
An emergency fund isn’t a “put and take” account. It’s a savings account that only has your emergency money in it, no co-mingling of funds with your vacation money. When you can’t comfortably afford to pay for an emergency out of your checking account, that’s the time you dip into the emergency fund.
3. Fund your retirement
Though it may be years away, there is going to be a day when you are ready to ride off into the sunset, leaving the workforce behind, set to enjoy your golden years.
For a 65-year-old to live on $65,000 per year from dividends and capital gains, they will need a lump sum of $1.62 million in a taxable retirement account. A formidable number, indeed.
But like any financial savings goal, it starts one dollar at a time. Depositing your tax refund into an individual retirement account may seem like a drop in the bucket, but every little bit helps. And because of compound interest, the younger you start saving for retirement, the better.
4. Invest in stocks
You know your money is going to earn very little interest in a savings account at your financial institution. But the thought of selecting stocks and “playing the market” sends chills up your spine. Mutual funds are quite possibly a good investment for you.
Mutual funds allow you to invest in many different companies at one time, spreading out your risk. Some invest in big companies, some in small ones. Some invest in technology companies, while others favor utilities. There are a significant number of choices, and a financial advisor can help you invest intelligently.
Grab a portion of your refund and take the plunge. It’s not gambling if you buy stock in good companies and hold onto it. Many a millionaire bought shares like G.E. and IBM years ago and held onto them. These stocks paid them dividends during retirement, allowing them to maintain a lifestyle similar to that they enjoyed during their working years.
5. Invest in yourself
Your greatest asset is you! Your ability to increase your income and multiply your happiness is under your control.
Take that class, go to that seminar, buy that book, spend a portion of your refund on something that will help you grow as a person. You don’t need to spend thousands on a weekend learning how to walk on hot coals; a $99 seminar on a Saturday teaching you a new skill is an excellent investment that you can make in yourself.
6. Make a donation
It’s true – giving is better than receiving. You probably have a cause or charity that you have donated to in the past. Now is a great time to help them again. In addition to the warm feeling you’ll have from donating generously, contributions are ordinarily tax-deductible.
7. Protect your income
Your ability to generate income is the most significant financial asset you have. If you’re thirty years old and earn $50,000 per year, you’ll receive over $1.5 million during the rest of your life, not counting raises and bonuses or commissions. If you protect a $30,000 automobile, you surely will want to protect your income.
Long term disability insurance is a must-have for any working person. If your employer is offering group coverage, consider yourself fortunate to have that employee benefit and take advantage of it. On top of that, you should also consider putting an individual plan in place. This coverage will stay in-force if you ever leave your employer and lose group coverage. Better yet, it will allow you to protect a higher percentage of your income. the
If you own or work for a small business, or are self-employed, shop for a comprehensive disability insurance policy through a reputable company. Use your tax refund to help pay the premiums. Run some online disability insurance quotes to find out what's affordable for you.
These are just some of the ways you can put your tax refund to good use. With any of them, you’ll have the self-satisfaction of knowing that you chose to use your tax refund wisely, and you’ll look forward to next year with the anticipation of building your tomorrow on the good choices you made today.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.