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It’s like the adult version of Christmas…tax refund (or return) time!
The day before your deposit, you stay up all night refreshing your online banking home page. You were dead broke all year and now it’s finally your time to scratch that itch and buy the things you’ve been dreaming of.
There’s just one problem…you’ll be back broke but this time with an abundance of things you really didn’t need!
If you’re owed a refund, look at it as a way to set your future self up for financial success. Remember those times you were super stressed out about money and ask yourself, how can I prevent that from happening again?
It’s no big secret that tax refunds helped me tremendously on my financial journey, and they can help you too!
Here’s what to do with your tax refund this year!
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Pay off debt
Of course, this was coming first! Paying off debt creates ownership, and frees up your money to do what you want versus what you have to.
When you’re not living a life that is borrowed you’re not stressed out from all of the payments that are due each month and you can begin to create more assets. Assets = income = wealth. Who doesn’t want that?!
I know I would not be as far as I am today if I had not used my refunds strategically. If you’re someone who isn’t able to apply much to your debt then making a larger payment can help you play catch up and make up for lost time.
Consider making this extra payment to your smallest debt to pay it off or knock down then balance. Then, use that motivation to continue snowballing your debts!
To help you make this your best year yet, I’ve created a free debt payoff course. I’m sharing the strategies that have helped me smash through over $19k in three years on a single income. Click to grab your spot here!
Related posts to check out:
Open a high-yield savings account
Tax refunds are a great way to step up your savings game! It feels good knowing you have a safety net set aside, and when saving in a high-yield account your money will be making more money. No kidding.
Savings accounts offered by your regular brick-and-mortar bank tend to only offer a 0.01% APY which results in you only earning pennies for your deposits. High yield savings accounts have a higher interest rate and are mostly found online. Instead of earning pennies, you could be earning dollars!
For example, let’s say you make an initial deposit of $5,000 and deposit $50 monthly.
If you saved in an account with a 0.03% APY your annual earnings will be approximately $1.58.
If you saved in a high-yield savings with a 2.05% APY your annual earnings will be approximately $108!
Setting up these accounts is super simple and the best thing is that most have no minimum requirement. Here’s a list of the best accounts to consider opening!
Pay up bills
If you’re low income, on a single income, or are drowning in debt then you know the stress of making sure bills are paid on time! One little thing goes wrong and then *BAM* your whole budget is thrown out of whack! (You do have a budget don’t you?!)
Paying up your bills, whether it be for a few weeks to a month in advance, allows you to focus on other financial obligations while enjoying peace of mind. If you’re falling behind on bills, now is the time to play catch up!
Open a college savings plan for your children
With the total student loan debt sitting at a whopping $1.6 trillion I think it’s safe to say that many of us wish we had a college fund!
While you’re looking for what to do with your tax refund, keep your children’s education in mind! The most common college savings plan is a 529, which is an account operated by a state, state agency, or educational institution. It allows you to set money aside for educational expenses such as tuition, room and board, and supplies.
These plans can be used at any accredited college or university in any state. The growth in a 529 Savings Plan is tax-free, and withdrawals will never be taxed as long as the funds are used for the sole purpose of higher education.
Invest in your business/business idea
If you have a business idea that you’ve been toying around with, bring it to life while you have funds to use! Life is too short to wonder about what “could’ve been” and investing in yourself will be your greatest asset.
Already have a business? Take it to the next level by using your tax refund to:
- Hire a business coach
- Upgrade your website design
- Create products/courses
- Enroll in courses/programs
Contribute to an HSA
A health savings account is a tax-advantaged way those covered under a high-deductible medical plan can save for future healthcare expenses. Most contributions are made pre-tax and earnings typically grow tax-free.
Any unused money is rolled over at the end of the year for future use.
Set up sinking funds
A sinking fund is like a mini savings account that’s used for a specific purchase or expense.
For example, let’s say you want to purchase a new makeup vanity that costs $300. You would set up a sinking fund for the vanity, contributing however much you need to a month to reach your goal. Then, when your sinking fund reaches $300 you withdraw the money and make your purchase!
You can opt to use a regular savings account or a free checking to act as your sinking fund. Personally, I love using Digit, which is a money-saving app that is designed for those who aren’t so great with saving money.
Digit reviews your spending habits to determine how much and when to save for you. After you link your account, your spare change is automatically saved for you and it’s crazy how such small contributions really add up!
Best thing is, you can set more than one goal and pause the automatic savings to make your contributions manually. It’s only $2.99 a month, but when you sign up through my link you can try it out completely free for 30 days!
Sinking funds to consider:
- Car repairs or a new car
- School expenses
- Home expenses
Get healthcare services you’ve been putting off
Healthcare is expensive, there’s no doubt about that. Unfortunately, the costs deter people from seeking the care they truly need.
That being said before you go out and grab the new iPhone make sure to get those cavities filled first!
Your tax refund can help cover your out-of-pocket costs after insurance payment, and instead of putting the balance on your credit card you can pay in cash.
Putting money into a savings account is a huge step up from having zilch set aside, but investing is key to long-term wealth. Although more high-risk, investments have the potential of a much greater return. You can purchase:
Stocks – Stocks are a type of investment that represents ownership in a company. Depending on which stock, or company, you wish to buy, you then decide how many shares of that stock you will purchase.
Bonds – Bonds are loans made to a company or government in exchange for interest payments. Although returns are lower than other investments, it is agreed to be paid by a specific date thus less of a risk.
Mutual funds – Mutual funds are an investment that pools shareholder’s money and invests it in a collection of securities. They’re professionally managed and considered more “low risk.” You will earn shares of the fund, which can be bought or sold at any time.
ETFs – ETFs (exchange-traded funds) are a collection of stock or bonds. It’s similar to a mutual fund, but with lower investment minimums.
Before you make this leap, be sure to do your research and understand what it is that you’re putting your money into. Don’t go about this willy-nilly style. Listen to podcasts, read books, and ask around!
Get home repairs
If you’ve been placing a bucket under a leaking roof then use this year’s tax refund to get some much-needed home repairs! Of course, start with the essentials first and when everything is in order treat yourself to getting rid of that ugly wall color you hate *wink*.
Contribute to retirement accounts
If you’re anything like I was, you’ve been barely contributing to your retirement account. Not because you don’t care about preparing for retirement, but because you don’t know too much about it!
All the talk about 401(k)s and other retirement accounts can sound like a foreign language and it’s easy to shrug it off because you think have plenty of time to start saving.
Truth is, the earlier you start saving the more money you can have with the least investment! Give yourself a boost by making an extra contribution and check out this post to help you make sense of 401(k)s.
Start or increase your emergency fund
It seems like every time things are going smooth for you financially something unexpected pops up. A meteor comes crashing through your roof or your car starts coughing.
Sadly, nearly 40% of Americans cannot afford a $400 emergency. Depending on the cost, it could send your finances up in flames and take you months (even years) to recover.
An emergency fund is a way to protect yourself against life’s ups and downs because you have a safety net of funds to rely on. If you don’t have at least $1,000 set aside, I highly recommend building this fund using these tips!
Donate to charitable causes
Money is simply just a tool that allows you to build the life you want and support the causes that mean the most to you. There’s power in donations, and there is no greater feeling than knowing you’re making a huge difference and impact.
This year, instead of wondering what to do with your tax refund, give yourself some financial relief. Write down what goals you want to knock out and use this money to support them!