It’s now that time of year that we dread and look forward to at the same time. It’s tax season! We dread it because the U.S. tax code is complicated and so is the refund process. It’s deliberately written to confuse the average Joe. But we look forward to it because we can expect that notification saying our refund has been deposited to our account. On average, Americans can expect a tax refund of up to $3,000. And what makes the 2021 tax season even more fantastic is the additional $1,400 stimulus check that is being distributed around the same time. While it’s tempting to spend this money on all the products on your amazon wish list, there are smarter ways to spend it that can enhance your financial wellbeing. If you’re interested in seriously managing your finances like a pro, here are 7 smart ways to spend your tax refund.
1. Build Your Emergency Fund
An adequate emergency fund is a non-negotiable in a sound personal financial strategy. You NEED one to protect you from unforeseen future events that could dissolve your savings. These events could be anything, such as a sudden car maintenance, a medical illness, a family emergency or worse, the loss of your income. For many, and adequate emergency fund is the difference between loosing ownership of your home and being able to pay your mortgage on time. Many Finance Guru’s recommend having at least $1,000 in your emergency fund while others recommend 3 months of expenses. I broke down the best way to start an adequate emergency fund in the post Yes, You Need An Emergency Fund!
2. Pay Urgent Overdue Bills
If you already have an emergency fund your next focus should be paying urgent overdue bills. Since the beginning of the Covid -19 pandemic many private companies had pledged to be lenient on persons who are having difficulty making payments. While this is great news, people are not absolved from their responsibility to pay for services/products that they have consumed. Consequently, the bills are adding up each month and the result is a snowball that will continue to grow until payments are made. If you are one of the persons who have taken advantage of this leniency, here is your opportunity to use your tax refunds to pay down on some of the bills that you owe.
3. Pay Down Urgent Debt
At the beginning of the pandemic the government placed all federal student loan and mortgages in forbearance. This means that holders of these loans no longer have to make payments on their loans and the loans do not gain interest. Unlike private loan companies, the terms of these loans are extended so there is no snowball effect and the balance of the loans remain 0 at the end of each payment period. If you have not been doing so, paying on these loans could have long term benefits. That is, all payments will be deducted from the principal, thus saving you money on interest payments later. This is a smart way to spend your tax refund.
4. Supplement Your Retirement
So you have an emergency fund, you’re current on all your bills and you’re debt free. The next best thing to do with your tax refund is to put it into a retirement account. In a study published in 2018, it was found that the average millennial has as little as $9,000 saved for retirement. This study shows that young professionals must actively work to ensure they have adequate funds saved for retirement. The extra cash can help you achieve a more financially secure future.
5. Invest Responsibly
There are many relatively low risk assets that you can invest in that promises generous refunds. Picking individual stocks can be challenging and time consuming for the average person. Rather than doing this, there are other options like mutual funds, electronic traded funds (ETF) and bonds. A mutual fund is a pool of money, contributed by investors, that is then invested in a variety of other financial vehicles. An ETF, on the other hand, is a group of securities that are traded on the stock exchange in a similar manner as stocks. Bonds carry less risk than mutual funds and ETFs. A bond is a loan that an investor lends to a borrower with the promise that the borrower will pay the lender interest and refund the principal at the end of the bond term. It is essentially an IOU. If you are secured financially, do this with your tax refund.
6. Invest In Yourself
2020 was a challenging year for most. Not just financially, but also emotionally and in some cases physically. A good way to spend your tax refund is to invest in yourself. This could be taking that professional certification course that you’ve always wanted, sign up for a webinar in your field, or purchase book/resource to advance a skill you want to develop. If you have a side hustle, maybe even invest in a marketing and branding course. Self growth is important in your journey to financial wellness. Therefore, if you can, do this with your tax refunds and develop skills and knowledge that your future self will thank you for.
7. Pay It Forward
If you’re in a place where you have completed options 1 through 6, then a great thing you can do with your tax refund is help others. You can do this in a variety of ways. If you like animals, consider donating to your local animal shelter; if you’re religious, consider donating to a local denomination; if you’re interested in education, donate to a local high school.
Think like a pro and consider these 7 smart ways to spend your tax refund. Your future self will definitely be thankful!
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