If you’ve read this blog for any length of time, you know I’m not a huge fan of giving the government an interest free loan every year (i.e. tax refunds).
But what if you’re like most people and you receive a tax refund this year?
What should you do with this sudden increase in wealth?
Why, you should invest it, of course!
Now, I’m using the term “invest” somewhat liberally, but the bottom line is that the best way to use your tax refund is to make it work for you, instead of the other way around.
Too often people receive a tax refund and aren’t sure what to do with it. Before they realize it, they’ve spent it all and have nothing to show for it! With that in mind, below is a list of 7 ideas when thinking about what to do with your tax refund this year.
Let’s get started!
1. Increase your emergency fund
If you have high interest rate debt, such as credit cards, payday loans, and even some student loans, you should have, at a minimum, $1,000 to $1,500 in an emergency fund.
If you don’t have any high interest rate debt, then you should shoot for 6-12 months of living expenses in your emergency fund. Although that may sound like a lot, my guess is that your tax refund will put a huge dent into that number!
How is increasing your emergency fund an investment when deciding what to do with your tax refund?
It allows you to you work towards becoming debt-free, without losing too much momentum if you have an unexpected emergency pop up (i.e. home repair, car breakdown, etc.) because you’ll have some cash on hand to help soften the blow.
2. Pay off high interest rate debt
When you use your tax refund to pay off debt, it’s like getting a guaranteed rate of return on an investment.
For example, let’s say you have a student loan with an 8% annual interest rate and you pay off that student loan with your tax refund. The end result would be similar to you investing that money at an 8% guaranteed rate of return for the remaining life of the loan.
If you can find another place to get a guaranteed 8% rate of return (or more!) in today’s low interest rate environment, let me know because I want in!
3. Beef up your retirement savings
If you think it’s too late to save for retirement in 2014, you’re wrong!
Contribution deadlines for some retirement accounts, such as a traditional IRA or Roth IRA are April 15 of the following year. In other words, you can make a contribution to one of these accounts for 2014 all the way up to and including April 15th, 2015.
If you’re otherwise eligible to contribute to these accounts, but didn’t maximize your eligible contributions, your tax refund might be just the thing you needed to help you beef up your retirement savings!
4. Open a 529 plan
Trying to save for your children’s or grandchildren’s college fund, but unsure of the best to accomplish that goal?
Check out your state’s 529 college savings plan (or “529 plan”) when thinking about what to do with your tax refund.
A 529 plan is a great, tax-advantaged way to save and invest for your little one’s future educational needs. In many states, contributions to your home state’s 529 plan are tax-deductible at the state level. Some states offer a tax credit, which can be an even better deal, depending on the percentage of the credit and your state’s income tax rate!
In addition, when it’s time for junior to head off to college, withdrawals used for qualified higher education expenses are generally tax-free at the state and federal levels.
Check with your CPA to verify any state-specific tax advantages and contact a fee-only financial advisor who can help you determine the best way to save and invest your 529 plan funds and other college savings.
5. Invest in yourself
In today’s economy, the right combination of education, skills, and experience can have a huge impact on your job/career prospects.
Here are a few ways you can invest in yourself and possibly gain a leg up on the competition…
- Finish high school, college, or graduate school
- Start a side business in your spare time
- Learn a new skill you can use in a current or future job
- Obtain a specialized certification relevant to your industry
- Learn a new language
It’s easy to forget that sometimes the best investment is yourself!
6. Take a vacation
Speaking of investing in yourself, when trying to decide what to do with your tax refund, it might be a good idea to use some of your refund to pay for a much needed vacation!
Since many of us are just a text message or tweet away at all times, we need to intentionally block out time throughout the year to rest and recharge.
Need some help planning that next big trip?
Click here to check out a recent blog post I wrote about how to plan the perfect vacation.
7. Give it away
If you’re a Christian in a wealthy country like America, there can be a strong temptation to put your hope and trust in the size of your bank account, rather than in the One who supplies your every need (Phil. 4:19).
Doing this, however, will only lead to sorrow and grief in the long run (1 Timothy 6:10).
One of the easiest ways to guard against this temptation is through regular giving.
Giving away some of your money reveals your attitude towards all of your money.
In addition to the positive effect giving has on your soul, there’s another bonus…you get to claim the deduction when you file taxes next year!
What else to do with your tax refund
Obviously, this list isn’t all inclusive and there are probably a hundred other ways (at least!) that you could “invest” your money when thinking about what to do with your tax refund.
But hopefully there are at least a few ideas on this list that are worth your consideration.
If you need help deciding the best way to invest YOUR tax refund, contact a fee-only financial advisor (like SageOak) who will come alongside you and help determine the best way to invest your tax refund now and in the future.
