A little over 80% of Americans this year will receive a tax refund. If you’re one of those individuals, receiving a tax refund can be a little bit like Christmas, your birthday, or if you’re really lucky an unexpected bonus at work.
Once you receive your IRS payout the obvious next question is where to spend your tax refund. For many, their tax refund will be used as a means of providing themselves with a special purchase, something they haven’t been able to buy for themselves. For others, it may be the opportunity to take that long deserved vacation to some warm secluded island.
Of course, everyone’s needs and wants are different. Some will focus on more of the short-term, one-time opportunities that a tax refund provides. However, if you’re interested in taking more of a long-term approach to spending your tax refund, here are three unpopular ways to spend your refund to improve your financial picture in the future.
#1. Fine-Tune Your Debt and Savings Plan
If you’ve found yourself in credit card debt after the Christmas and New Year holiday, or you have depleted your savings it might be the right time to use that tax refund to get back on track.
With the average credit card interest rate at a little over 15% carrying a credit card balance and making minimum payments will cost you a lot of money over the course of the next year. Not to mention it creates a whole bunch of stress. Use your tax refund to pay off high-interest credit cards. (Sign-up for a free credit monitoring service like Credit Karma to help you monitor your score and activity.)
Did you drain your savings account? Not having an emergency fund is one way to continue to accumulate credit card debt. No emergency fund – stay in debt. Use your tax refund to re-establish an emergency fund so you won’t have to worry about that next unexpected expense.
Whether it’s debt pay off or saving for an emergency fund, your tax refund can be used to re-hone your finances and better position you for the future.
- How Should I Spend My Tax Refund? The FTP 60/30/10 Rule
- The Real Reason You Should Prepare Your Own Taxes
- How to Pay Off Credit Card Debt Using the Snowball Method (video)
- Why You Need an Emergency Fund
- What You Shouldn’t Do with Your Holiday Credit Card Debt, and How to Avoid a Repeat Next Year
- Creating a Budget and 6 Quick Tips on How to Spend Less Money in 2019
Tax Software Resources: (My top three recommendations, if you haven’t done your taxes yet.)
#2 Make More Money
If your credit card debt and emergency fund are in order, consider using your tax refund as a means of making more money through a retirement plan or investing in a security like a mutual fund.
The average tax refund in the U.S. is a little over $3,000. Investing $3,000 in a mutual fund earning a 9% return could make you:
- In 10 years – $7,102
- 20 years – $16,813
- And in 30 years – $39,803
Not a bad way to take your tax refund and make more money. In addition, if you invest in a mutual fund through a Traditional IRA you will get the benefit of a tax deduction. Check with your accountant to see how you can best leverage your tax refund for the future.
Another option is to invest your refund with a robo-advisor like Wealthsimple. Wealthsimple provides automated investment strategies and requires no minimum investment.
- REIT Investing
- What is a Mutual Fund?
- What is an IRA?
- How to Start Investing in Mutual Funds
- Lower Your Taxes and Start Investing by Opening a Traditional IRA Account For Retirement
- How to Create Passive Income Through a Dividend Income Strategy
- 10 Successful Money Management Tips to Live By – from a 52-Year-Old
- How Surviving Wisconsin Winters is Like Managing Your Money
#3 Invest in Yourself
#1 and #2 are all about money, but what if you were to use your tax refund as an investment in you. For example:
- Extra skills training for your job or career. (Learn a new language with Rosetta Stone?)
- A college course to expand a specific area of interest.
- Start your own side business. A craft, cooking, author a book…what’s your passion?
Spending your tax refund on you in a way that expands your knowledge and broadens your opportunities is always a great investment.
- How I Made Over $30,000 in 4 Months Flipping Stuff – How to Flip Stuff and Make More Money
- How to Self-Publish an eBook in 5 Steps
- Starting a Home-Based Business – Consider These 5 Thing Before You Start
- Check Out My Recommended Books for Creating Change, Thinking Different and Self-Empowerment
The reason these three ways to use your tax refund are unpopular is that the benefits are experienced long-term. There is no immediate gratification.
For most a tax refund is an annual event, an event that will take place next year and the year after that. This type of recurring circumstance has a tendency to lull us into a state of short-term actions – i.e. we don’t think about the future.
However, if you can think about your tax refund as a long-term opportunity, then the actions you take with your tax refund will benefit you for many years into the future. Change and shift your perspective from short-term to long-term then your actions won’t be viewed as unpopular, but rather smart.
- Motley Fool – Stock Advisor
- Wealthsimple – Socially Responsible Automated Investing $0 Account Minimum
- Credit Karma – Free Credit Score, Monitoring & Insights
- Rosetta Stone – Learn a New Language
- Ebates – receive cashback for purchasing the things you would buy anyway.
How do you spend your tax refund? Comment below.