Tax refunds might not be a sure thing, but they can be an excellent tool for getting ahead financially, whether through investing in yourself or putting it away for the future.
While they may not be sure, getting a sum of money back from the taxman is always a bonus, and there are things you can do to reap the benefits for a long time.
In this article, we look at what you can do to get the most out of your tax refund.
1. Put it towards paying off debts
One of the best things you can do with a tax refund is put it toward your debts, whether they are student loans or credit card debts.
Living with debt can be incredibly difficult and stressful but taking even a tiny amount off what you owe can help to ease the pressure.
- Starting with the debt with the highest interest rate is an excellent way to get started and will help you save money in the future. Not only do you tackle a chunk of debt, but you can also prevent yourself from paying high interest further down the road.
- Another approach is to pay off the smallest debt first, which will give you the confidence and boost you need to keep going.
2. Create an emergency fund or add to an existing one
An emergency fund is a tool you can use in financial emergencies like job loss, medical expenses, a broken-down car, or any significant amount you don’t typically have lying around.
Ideally, you want to have around six months’ worth of expenses in an easily accessible account.
It’s a privilege many people don’t have, but using your tax refund to start an emergency fund is a great way to put it to good use.
Even a tiny amount can help you out in the future; you can always add to it depending on your own goals. In addition, if you already have an emergency fund, your refund can still be used to add to it or supplement previous purchases.
- Consider using a high-yield account to store your money to allow it to build passively. And remember to use it only for emergencies; there’s no point having a fund if you dip into it for non-emergencies.
3. Put it into your retirement fund
Having a solid retirement fund is vital and a great way to invest in your future. Unfortunately, it’s impossible to know what might happen further down the line, and a retirement fund can help secure your future. A great way to start one – or contribute to the one you already have – is with your tax refund.
- Using your refund, you can add more toward your employer-sponsored plan, meaning you can save more overtime at a lower cost to you. It might also mean you can spend less on it in the future.
Alternatively, you can put it toward setting up your retirement fund. As with any fund, you must start somewhere. Even a small amount can get you started with a retirement fund and allow you to start building it up over time.
If you decide to set up your own, look into how much you can contribute before getting taxed and ensure you choose the best place to set up your fund. Ideally, you want your retirement fund to remain tax-free and high interest to allow it to build up without excessive cost.
4. Add to your savings
It’s always good to have extra savings available for extra purchases or everyday top-up spending. Even with an emergency fund, a savings account can help you save up for those purchases you don’t want to wait for.
By creating or adding to a savings account, you can use your tax refund to contribute toward your savings goals and build up your finances. It’s a great way to ensure your financial safety and protect yourself from unnecessary spending.
5. Fund your self-development
Personal development is always a worthy investment, especially if you can use it to further your career or skills.
For example, your tax refund could be used to take a class, complete a course, or invest in a hobby. You never know where your new knowledge could take you; you could even create extra income.
If you have ever considered setting up a business of your own or wanted to create an income from a hobby, your tax refund could allow you to do this.
- Investing in yourself and your career is a meaningful way to spend the extra income and set yourself up for the future.
6. Put it into a college fund
Saving for college for yourself or someone else is a great way to use the funds you have now to serve yourself in the future.
It’s a good idea to put some of your tax refunds into a college fund for yourself or your child, regardless of your intentions when you get it. You never know how your plans might change, so it’s good to have some funds available.
7. Use it for travel
Think about using your tax refund to book travel somewhere you’ve always wanted to go.
Consider it extra money, the income you wouldn’t usually have. In this case, using it for travel is a great way to use it. Depending on the amount you receive, you could have the opportunity to go on an extraordinary trip.
8. Pay off or put it toward any big expenses
Large expenses can contribute a massive chunk of monthly finances. Your tax refund can help take some of the pressure off.
Things like mortgages and car loans often come with hefty interest rates, meaning you pay more than you may initially realize. Putting your tax refund toward such payments can help cut back on paying interest.
Paying off a chunk of your more considerable expenses can also mean that you pay less in the future, as your monthly payments are likely to be smaller and more affordable.
You may also find that you can pay it off earlier. As we’ll talk about next, your tax refund can be used to make big purchases.
9. Put it toward a big purchase
Occasionally, we have big purchases we can’t afford without a little extra help, such as a down payment for a house or a car purchase. Sometimes, the most sensible thing you can do is use your tax refund to pay for those things you want but wouldn’t ordinarily be able to afford.
Puts simply, it means you can avoid spending money you don’t have, putting your tax refund toward those big purchases is ultimately a sensible decision. It’s a great way to avoid spending money you know you can’t afford and resist the temptation to dip into savings or emergency funds.
10. Use it for necessary purchases
Alongside things like a retirement fund, there are other necessary purchases we sometimes put off spending money on.
For example, things like life insurance and health insurance might cost more than you are willing to spend, but they are essential to protect yourself in the future.
Consider upgrading your current insurance or investing in a solid plan to help yourself in the future.
You never know when you might need the protection of insurance. Of course, you’re also helping yourself financially; a solid plan is likely to prevent you from paying out vast amounts if anything happens.
Summary
A tax refund is an advantage not everyone gets. If you are fortunate enough to be one of the lucky ones who receive a refund, make sure to use it wisely to keep seeing the benefits for a long time.
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