How Are YOU Spending Your Tax Refund?
If you’re lucky enough to have the essentials covered, you may be tempted to treat yourself to dinner at your favorite restaurant or a nice bottle of wine, which is fine.
But instead of using the money for some sort of summer getaway, many people struggling with rising inflation will need to use their refunds to pay for gas and groceries.
So once you’ve scratched that “throwing money out the window” itch, consider some ways to put the rest of your tax refund to work for you. In this article, we’ll go through our six favorite ways that you can use the money you get back with your tax refund this year.
You can even use your money to make MORE money through a few of these methods! With that being said, let’s see how we can put that tax refund to work!
Start A “Peace of Mind” Account
This first idea of what to do with your tax refund is also probably the MOST important! Everyone has had a random event pop up that they never planned for. It might have been about car breakdowns, home repairs, or an unexpected medical bill.
Saving for these unexpected events ahead of time allows you to be prepared when they occur. In other words, you can be ready for the unexpected. Most people will call this an Emergency Fund or a Rainy Day Fund. We prefer to call it a Peace of Mind Account.
No one likes emergency situations, but everyone wants to feel safe… unless you’re a masochist. But because of unique circumstances, this can be excellent for your financial and emotional well-being.
A good rule of thumb is to keep about six months’ worth of savings in an account. Some people prefer more, some less, but that all depends on you.
If you don’t have that Peace of Mind Account right now, you might want to consider using at least a portion of your tax return to put toward it.
Pay Off Some Debts
The average credit card interest rate is already a significant 16.36% as of April 20, 2022, according to CreditCards.com. While your tax refund could go toward something fun, like a shopping spree, it could also go toward making your financial future better.
And by better, we mean stress-free. If you pay off your current balances, you’ll get a return on your investment that a successful hedge fund manager would envy.
And if you’re able to pay off the total balance, you’ll also eliminate a pesky monthly expense, which will give you some breathing room if you’re ever in a bind.
The way we see it, erasing credit card debt or any other obligation frees up more of your monthly budget for things that can make you more money, like investing.
Even if not used for investing, say you have a minimum monthly payment for your credit card of $150. When you clear that debt, you’ll have $150 more freed up to do whatever you want.
Are You Retirement-Ready?
If you were to use your tax refund toward your retirement account, you could expect that nest egg to grow a little more quickly than before. Let’s say you had a $3,000 tax refund and invested it for a 9% annual return.
It would end up being over $16,000 in 20 years. If you did that with your tax return every year, given the same refund, your investment would come out to about $153,000. We could ALL use an extra 100 grand in our retirement accounts, right?
If we already have around $60,000 saved for retirement, just by giving up our tax refunds for the next 20 years, our retirement accounts would be worth over half a million. That doesn’t even include the money you contribute monthly.
If you put away $200 monthly on top of that, we’re looking at about $673,000 total in just 20 years. Employees can do this with their 401(k) accounts as well. If your employer matches your contribution, that means even more money.
Once you max out the employer-matching benefits on that plan, you can get your own IRA or Roth IRA, some of which can be self-directed accounts, meaning you choose the investments your money goes into.
Those kinds of retirement accounts are either tax-deferred or tax-exempt, allowing you to save money on taxes.
Take Care Of Your Health
You can create a health savings account if you have a high-deductible health insurance plan. This means a deductible of at least $1,400 for single coverage or $2,800 for family coverage.
An HSA offers you a triple tax break, your contributions are tax-deductible, the money grows tax-deferred, and you can use it tax-free to pay out-of-pocket medical expenses.
The CARES Act has increased the types of expenses that are eligible for tax-free withdrawals from your HSA.
Besides the health insurance deductibles, co-payments, prescriptions, and medical expenses that aren’t covered by your insurance, you can use tax-free withdrawals to pay for most over-the-counter medications and even feminine-hygiene products.
Even though health-insurance premiums are not usually considered qualified medical expenses, there’s an exception if you use withdrawals to pay COBRA premiums or for other health-insurance premiums if you’re collecting unemployment.
…Did you ever think to use your tax refunds for your health?
Make Some Passive Income
Passive income can drastically change your day-to-day life, not just your retirement. It has become somewhat of a trending word for the younger generations because we all want to make money but don’t actually want to work for it.
There are many ways to start earning some passive income. The most popular method, though, is through real estate. Yes, you read that correctly. There’s really good money to be made in real estate investing. If 90% of the world’s millionaires can do it, why can’t you?
The great thing is that it’s easier than ever to start investing in real estate nowadays. You can even rent out a room in your house for passive income on Airbnb. That tax refund can make that extra room more attractive to potential renters.
You could also do it the old-fashioned way and put that tax refund toward a down payment on your own rental property. This will allow you to learn the skills of real estate investing and grow your portfolio over time.
That method takes research and a good eye for deals, but it can certainly put you on the road to financial freedom.
Start Or Grow Your Own Business
If starting your own business is something you’ve had your heart set on or you would like to grow your existing company, you can use your tax refund as capital.
With online companies becoming more and more popular these days, you don’t necessarily need a ton of money to get started. If you wanted to, you could even get a new business up and running in a couple of days. Just imagine having the freedom to make money however you want. No boss. You get to create your OWN schedule.
If you’re using your passion to earn income, you aren’t even “working” in the general sense of the word. And let’s not forget: TAX DEDUCTIONS! Especially if you’re running your business as a side project. That’s a surefire way to get a huge tax return next year.
…If you happen to be good at crafting various objects and want some tips about how selling online works, we suggest: Sell Your Crafts Online
As we’ve explained, there are many options for spending your tax refund. All the methods we discussed provide you with ways to level up your financial stability. Even if some, like starting a business, turn out to simply be a learning experience.
That experience can double your potential to live a more fulfilled and financially successful life in your golden years. What to do with your tax refund is entirely your decision.
So even if you still want to take that trip to Italy, at least now you know how that money could’ve been used elsewhere. No matter what you choose to do with your money, thoroughly enjoy it.
As far as we know, we’ve got one life, so make it the best you can in whatever way works best for you!
While we’re on the subject of finances, this may also interest you: 8 States With The Highest Income Tax Rates