Stop! Don’t buy that new iPhone with your tax refund! You can put it to much better use!
The money you get from your tax refund can be a great way to set yourself up for a better financial future. If you are expecting a pretty decent tax return this year, here are some smart ways to make your money work harder for you.
Invest for Emergencies
If your transmission in your car went out right now, would you be able to afford to replace it?
Did you know it is recommended to have between three and six months of living expenses in a liquid savings account?
If you do not have any type of emergency fund, using your tax return to start one might be extremely beneficial for you.
Instances like this are exactly what an emergency fund is for. You don’t need to save all of your tax refund for emergencies, but it is best to put back as much of it as you can.
Pay Off Debt
Credit cards typically have a high interest rate making them hard to pay off. Instead of booking a vacation with your tax return—which might not be that fun right now anyway—pay off some of your debt instead.
- Start with your debt that has the highest interest rate, such as your credit card balance that seems to never get any lower.
- Getting rid of this type of debt will save you money in the long run by avoiding all of the interest charges.
- If you don’t currently have any credit card debt, or you don’t have an interest rate/balance that is manageable, consider paying down the balance of your car or your student loans.
Both of these actions will save you money on interest as well.
Invest for Retirement
There is no such thing as too much money when you are heading into retirement. Sure, you might already have a retirement plan, like a 401(k) where your employer matches your contributions. However, you can also open an IRA to increase your savings for the future.
There are two types of IRA accounts: Roth and Traditional. When you put money into a traditional IRA, you get an upfront tax deduction. The money will grow tax-deferred, but you will need to pay taxes on the money when you start taking money out.
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When you put money in a Roth IRA, there is no immediate tax deduction, but when you start taking money out in the future, it is tax-free. There are no required withdrawals with a Roth IRA, meaning there is some more flexibility in it.
There are limits to keep in mind when it comes to IRA accounts and 401(k) accounts.
If you are under 50, there is a maximum contribution of $6,000 in an IRA and $19,500 in a 401(k). If you are over 50, there is a maximum contribution of $7,000 in an IRA and $26,000 in a 401(k).
Put Money in a College Fund
If you are a parent, you might be wondering how you can save for your child’s college education. The best way to do that is with a 529 college savings plan, which is similar to a Roth IRA.
Your money will grow tax-free, and as long as it is used toward education.
There are two different types of 529 plans. The first is a college savings plan and the second is prepaid tuition.
The college savings plan is similar to a Roth IRA account because you invest after-tax money in mutual funds. This plan will fluctuate in value depending on the value of the investments.
The 529 pre-paid tuition plan will allow you to pay for all or part of in-state tuition at a public college. They might also be able to be transferred to an out-of-state college. There is also an option for a private college prepaid plan.
Increase Your Down Payment
If you are saving to buy your first home, your taxes can increase your down payment. This can help save you from expensive private mortgage insurance and can also reduce the overall mortgage that you take out.
If you already own a home, you can use your refund to do some improvements around your home. Improvements and renovations can help increase the resale value of your home.
Even if you aren’t planning on selling your home any time soon, improvements are always a good idea. Renovate that bathroom or finish the basement, whatever your house needs!
Make a Donation
Donating is a great way to invest in something that you are passionate about. Focus on finding charities that do the best for people.
Before you donate any money to a charity, do not be afraid to ask the charity’s representative some important questions. Ask them how they spend the money that you are giving them and how they are changing the world.
There are so many charities that are worth donating to. The representatives will be happy to answer those questions for you.
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