Are you expecting your tax refund this year? Before thinking about spending your tax refund on a new Yamaha that you always wanted to ride or add new items to your virtual shopping cart, take a pause and think for a while. You need to use your tax refund wisely.
According to the IRS, the average tax refund was $2,729 for the financial year 2018. If you are anticipating your tax refund this year, then there are several great ways to use it. Because the tax refund is not a bonus or free money. It is the money that you had overpaid in taxes. So, it is your hard-earned money that does not deserve to be spent on unnecessary things.
Tips on using the tax refund wisely
Since the tax refund comes only once in a year, you have to decide smartly on how to use it. Here are some wise ways suggested by financial experts.
1. Get rid of the debt
There are several things that you owe money for with interest, like a mortgage, vehicle loan, or the money borrowed from an individual. The tax refund obviously wouldn’t help you to pay off all the debt, but it can significantly help you to get rid of some of the debt.
For example, you have an outstanding balance on your credit card, for which you are currently paying just the minimum balance. Credit card interests are usually in two digits which costs you a lot in the long term. You can clear your outstanding credit card payment with your tax refund. If you are paying an interest of 18% on an outstanding balance of $1000, then you will have to pay around $2000 in interest for one year. That’s double the principal amount. What you have to do is get rid of that $1000 by paying in one go.
2. Initiate an emergency fund
There are times in life when you have to face the unexpected which cost you a lot in one go. For example, your basement gets flooded, your car sits on four flat tires, or loss of job. If you don’t want to put all your tax refund in an emergency fund, then try to put at least half of it. When such unexpected circumstances will happen, you will be glad that you have taken a great financial step by starting an emergency fund.
Many financial experts say that most of the people aren’t even prepared to handle an emergency that costs only $500. Then they go into debt and pay the interest, eventually losing a lot of money. Emergency fund can give you a peace of mind during a financial crisis.
3. Save for an expected expense in future
Another smart decision that you can make with your tax refund is to save it for an upcoming expense, like a wedding reception, college fees for your kids, etc. If you do not budget for requirements, and keep on spending irregularly, then you are preparing yourself for financial problems.
What you can do is put all or portion of your tax refund into an online banking solution that doesn’t allow you to withdraw the way you do with your debit card. You can also put money into fixed deposits or take up a plan for your kid’s future. There are many plans nowadays starting at only $25 which can help you to avoid yourself from becoming a part of 44 million people in the US with student debt.
4. Do something that you always wanted to do
If you don’t owe any debt and have saved for an emergency fund, then you should not shy away from spending your tax return on things that you always wanted to do. There are certain things that you enjoy, like taking vacation and visiting some Asian or European country, explore and experience new things, etc.
You have worked hard to earn the money and you deserve a break to do things you enjoy. Experts suggest that you should spend 20-25% of your tax refund on fun, vacation, or shopping.
5. Save for your retirement
Everyone should have a retirement account. If you don’t have one, then it’s time to open a new one. Research by Schwab says that over 60% of the Americans are not saving regularly for their long-term goals, like retirement. Before retirement, you get a lot of years to save money for your post-retirement life. If you are unable to save from your regular income, then tax refund is a great option for the same.
6. Start your own business
Saving your tax return for a few years can help you to start your own business that you always dreamt of. If you are meeting your needs with your income and are able to save some part of it, then saving the tax return for a few years is a smart way to invest in your own business.
If you have the zeal to become an entrepreneur, or to come up with an innovative startup, then it’s time to make a wise decision with your tax refund. Till the time you have enough to invest in a business, you can put your money in a savings account that pays good interest.
7. Donate for a cause
Donating some amount from your tax refund may not help you directly, but it will make you feel better if you help others in need. Find the charities and organizations in your region that help the needy and underprivileged people. Apart from donating directly, you can also visit places like orphanages or meet the needy people, take them out for some shopping, arrange meals for them, etc.
There are numerous things that you can do with your tax refund and use it wisely, rather than spending it on unnecessary things. We hope that the ideas and smart ways mentioned above will help you make a wise decision while using your tax refund.
If you know of more ways, let us know via the comments below.