A tax refund can either be something you invest wisely or waste frivolously.
Regardless of how much you get back, it’s important to think critically about how to use your tax refund. You want to make the most out of every dollar.
If you’re drawing a blank, read ahead and discover some time-tested and proven ways people have traditionally invested their tax returns over the years.
Top 5 Ways to Use Your Tax Return
1. Start An Emergency Fund With 6 Months of Expenses
The recent pandemic was a wake-up call to people worldwide that the economy, and the way we work, can change quickly and dramatically. If your job suddenly ceases, you might not have any options left over but to use your emergency fund.
If you don’t have an emergency or are short of the 6-month expenses you need, a wise choice is to use your tax refund here. Set aside whatever money Uncle Sam returns to you and keep it safe in this fund for the next rainy day. In today’s economy, anything is possible, and it pays to be prepared.
2. Invest In An IRA
If you are not already set up with an IRA, then start one when you receive your tax refund. If you’re not yet 50, you can put in about $6,500 each year. If you’re over age 50, then you can put in $7,500 to catch up.
Whatever your age, if you’re still working, setting aside some money for retirement is one of the best things to put your money toward. Any windfall that comes your way should go straight to retirement. If you set aside all your tax refunds in an IRA fund from an early age, you would have a significant retirement income to live off of. You want to retire comfortably (maybe even retire early) and not be working into old age tirelessly.
3. Invest In Starting A Small Business
If you have an idea, or a desire to work for yourself, the tax refund you receive may be just the starting capital you need to get off the ground. You might not want to invest all of your money too quickly, but you can start out small.
A great way to create your own business is to start consulting in your line of work. You can put your money toward advertising or your website. You can also start a blog or open an Etsy store. Whatever you decide, you will reap the benefits of being a business owner.
4. Invest Your Money In The Market
As they say with investing, set it and forget it. The best way to do this is to choose an exchange-traded fund (ETF) or mutual fund that tracks an index like the S&P 500. The fees for doing so are low, and the returns in the long term are well worth it.
If you are a current investor, you can add a lot more money to your current holdings or add to your existing portfolio with a lot of new income.
5. Start A College Fund
A 529 college fund is the most common one. If you don’t have children, you can always invest in your relatives’ children or use the money for your own future education plans.
You Choose What’s Best For You
These five ideas will help you put your tax refund to the best use. Most of these things are essentials and represent safe ways to use this money and have it work for you.
They either critically help you earn more money, or they are for necessary expenses that you must invest in throughout your life, like retirement, work, or college. You choose which idea is best for you based on its importance and personal priorities.