Now that tax season is over, you may be anxiously awaiting your refund, or perhaps you’ve already received it and are daydreaming about all the fun, frivolous ways you could blow it.
Not so fast, my friend! In this post, we’re talking about 4 smart ways to save and invest your tax refund.
#1 - Emergency Fund
One of the biggest reasons why people rack up bad debt is because they don’t take the time to build up an adequate emergency fund to begin with. You should aim to have 3 to 6 months' worth of essential expenses saved to protect you from the unexpected (job loss, major home or vehicle repair, injury, etc.).
Use your tax refund to either get a head start on your emergency fund or top it off to that 3 to 6 month level.
#2 - Pay off debt
Use your tax refund to pay off your credit cards, student loans, car loan, or house faster! When you make extra payments, you can elect to treat them as principal payments only. This means that every cent of your extra payment reduces your loan balance, rather than going to your lender as interest.
Paying down your principal faster can help you pay off your loan months or even years faster, and save you a ton of money in interest in the process. That means more money in your pocket at the end of the day.
#3 - Roth IRA
A Roth IRA is an Individual Retirement Account that you fund with money that has already been taxed. Since you’ve already paid tax on that money, it’s allowed to grow tax-free and can be withdrawn at retirement tax-free as well.
So if you were a little light on your retirement savings last year, or are looking for a way to boost your nest egg for the future, investing your tax refund in a Roth IRA may be the best use for it in the long term.
How good of a use you ask? The average tax refund in the US is currently in the $2,500 to $3,000 range. If you were to invest $2,500 for 30 years and earn 7% on your money during that time, your original $2,500 investment would be worth about $19,000 after 30 years!
#4 - Add to A College Fund
Invest in your child’s future! Contribute some or all of your refund to a college savings account like a 529 plan. Accounts like these are great investment vehicles because your money grows tax-free over the years, and the earnings are untaxed when used to pay for qualifying education expenses.
WHAT NOT TO DO WITH YOUR TAX REFUND
Now that you have some smart ideas about how to use your tax refund, let’s talk about what not to do with your refund:
Don’t make a large impulse purchase
Your tax refund is not new or extra money. It’s your money that you essentially lent to the government for the year that they’re now paying back. Don’t squander it away on something you don’t actually need.
Don’t gamble your tax refund way
Again, it’s not new or extra money. Don’t blow it all at the casino or on sports betting. You probably shouldn’t use it to buy some hot new investment like bitcoin or new stock in an IPO.
Without proper research and intention, buying risky investments is pretty much the same as gambling.
Don’t put it in a low yield account
If your money isn’t earning a return of at least 2-3% per year, it’s actually decreasing in value because of inflation. If you’re going to save all or a portion of your refund, make sure it’s doing some work for you in a high yield savings account.
INVEST YOUR REFUND IN YOURSELF
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