Tax refunds can come with a great deal of excitement, especially when you get back more than you expected. You work hard all year, and sometimes it may seem that all you do is work and pay bills. So, when tax time rolls around, it can be an exciting time thinking about what you are going to do with that extra influx of money. While it can be truly exciting to think about planning a family vacation or a big purchase for your home once your tax return hits the bank, you might want to reconsider.
Saving money is tough. You are no different from anyone else if you want to do more of it but always seem to fall short in your plans. Your tax refund is a great chance to make a financial decision that helps set up your future success. If you are bringing in a substantial tax return, there are several ways you can make that money work for you. Here are some great tips on how to spend your tax refund.
Create or Replenish Your Emergency Fund
Many people do not take the time to create an emergency fund for their household. This is a huge mistake because this money can be a lifesaver if and when unexpected expenses hit. A sudden financial need can put a damper on your household budget, taking away money intended for regular bills or charging up your credit cards and taking on interest. When you don’t have an emergency fund, you are vulnerable to the possibility of job loss, medical emergency, or the need for major repairs. Using your tax refund to start or replenish a used emergency fund can leave you less stressed if an emergency strikes.
Pay Off Debt
If you have balances on your credit cards, you may consider using your tax refund to pay them off. This allows you to put more money in the bank monthly. You’ll ditch the high interest rates and the monthly payments, leaving you with some extra cash to use for other expenses.
Increase Your Retirement Fund
Adding to your retirement funds with money that isn’t straight out of your paycheck is a great way to get that account booming. Talk to your financial advisor about whether you should invest in a Roth or traditional IRA. When retirement rolls around, you’ll be happy you didn’t waste that big return on an impulse purchase.
Consider the Future
If you have a family, you know that you aren’t the only one you need to think about when it comes to the future. There are many ways you can invest in your children. If you children are at working age, they may contribute up to $5,500 for an IRA as long as they earn that much income. If you have kids, you know they probably aren’t going to jump at putting money away this young for retirement. But, you can invest for them. They might not thank you now but they will definitely thank you in the future.
Speaking of future, another thing to consider is the college fund. Starting a college fund when your children are young can benefit them in big ways when they get older. It might be hard to look at your little infant and think about college, but that time will eventually come. Setting up a 529 plan can ease the burden of financial investment when they get into college. This will help them achieve their diploma without a massive amount of debt. You may even be able to pick up a deduction on your state income taxes, so talk to your financial planner before you invest.
Invest in the Stock Market
On the topic of investing, the stock market offers a great return on investing than saving accounts, CDs, or bonds. You just need to make sure you invest the right way. Pick individual stocks that move up and down along with the market. This will ease the risk and give you a better long-term outlook to stock market investing.
Prepay Your Mortgage
Making extra mortgage payments with your money can be a huge benefit in the long term. So much of your payment goes to interest that reducing the principal on your loan can take a lifetime. Adding an extra payment or two can make a big difference when it comes to the life of your loan.
Make Home Improvements
A great way to spend your tax refund is to make home improvements that can help reduce your household bills. If you live in an older home, you can replace old windows, purchase energy saving appliances, and improve the efficiency of your house to reduce your electric bills and more. Even remodeling that old kitchen can have a big effect if you are considering selling anytime soon. When you improve the functionality of your home, you are also making it much more attractive to potential buyers.
Purchase Life Insurance
Life insurance is one of those things that no one wants to talk about and most people overlook. You either don’t know the right way to buy or you think you are too young to need it. The truth is, tomorrow is never promised and we don’t want to leave our family with a huge financial burden while they are grieving our loss. The great thing about life insurance is that the younger you are, the cheaper it is. Investing in life insurance with your tax return can ensure that your family will maintain their standard of living if the unthinkable happens to you.
Start a Business
If you are one of those people who has always dreamed of starting your own business on the side, now may be the time. And, who knows, it may turn into a long-term career. What can be better than that? Your tax return can be the seed money for your own business. Turn your hobby into a money-making enterprise and you’ll be happy you decided to spend your refund this way.
Kick Start Your Career
If you feel stuck in your current position and those around you seem to be moving on and up, you might want to start thinking about what they have that you don’t. Your tax refund can be the tool to bring you to the next level. Use it towards educational courses in new skills that can benefit your business. Get a jump start on working with the newest databases or programming skills. When you invest in your education, you can also take advantage of the Lifetime Learning credit. This will take money off your taxes next year. It’s a win-win.
So, we burst your bubble when you were thinking about that latest form of technology or that dream vacation. The truth is that so many people waste their tax returns and later feel “if I only had that money back…” Don’t let that be you. Consider one of these smart savings tips when your tax refund hits the bank. Not sure which will fit you best? Talk to your financial planner or advisor about the best way for you to get the most of your tax return this year.