Tax season is here and to many of us that means one thing… Tax Refund!
I know there’s a debate whether we should be getting a refund or changing our withholdings to get more on our paychecks, but that’s a discussion for a different time. Let’s not rain on anyone’s parade and let us enjoy our refund for now.
We all enjoy getting a tax refund. It feels like we just won a scratch-off. One of the reasons we love tax refunds so much is because we like to spend money and this is extra money that we can spend freely… or so I thought.
I used to buy all kinds of stuff with my tax refund – I bought my motorcycle with my tax refund – and it felt good for a few weeks.
That good feeling slowly faded when all that money was gone and I still had debt and almost nothing saved.
If this sounds familiar, here are a few suggestions on what you can do with your tax refund that makes you feel good for a long time.
How to Spend your Tax Refund Wisely
1. Pay Off Debt – This is exactly how I am using my tax refund. I am going to finish paying my student loans and be officially debt free! Paying off debt should be priority because it usually means we are paying interest on that debt. We should stop giving our money to credit card companies and loan companies, and start keeping that money for ourselves.
2. Build An Emergency Fund – I can’t stress enough how important an emergency fund is. You just never know when your car is going to break down or when your home furnace is going to break. Having money in the bank for those emergencies will help us sleep at night and help us avoid going into debt.
3. Fund Your Retirement Accounts – You should already have been contributing enough on your 401k/403b to get the company match, if you get a match, but now you should use your tax refund to open or fund a Roth IRA. Roth IRAs are a great way to supplement your retirement savings.
4. Save for College – If you have kids and want to pay for their college education then using your tax refund to contribute to a 529 plan is a very wise choice. The average tax refund by this time last year was $3,034. If you invest those $3,000 in a 529 plan every year for 18 years, you would have $112,000 to pay for your child’s college tuition – assuming an 8% return. The fun part is that you would have only invested $54,000 of your money, the rest would be from compound interest.
5. Invest In a Taxable Account – Another wise way to spend your tax refund is to invest it in the stock market via a taxable account. It is a sure way to make your money grow. This was the way Ronald Read made his $8 million despite his modest salary.
6. Go on Vacation – This should only be done after the previous 5 ways above have been met… at least the first two. We should also spend money on ourselves and enjoy our lives. But instead of buying things that don’t last, why not go on vacation and spend that money on an experience that will last a lifetime?
However you decide to spend your tax refund, just remember to do it wisely. If you are debt free, have a fully funded emergency fund, and are saving enough for retirement, please feel free to do with your refund whatever the heck you want because you are already doing what you need to be doing.
Have fun and enjoy your refund!!!
What are your plans for your tax refund?