Getting a tax refund is like celebrating a belated Christmas. But instead of spending money to be happy, you get money.
While there are many ways you can spend your tax refund, there are also ways you can invest in yourself and your future. Here are some ways to invest your tax refund.
Table of Contents
1. Pay off old debt
If you’ve been struggling with past debt, like credit cards, student loans, or medical bills, now is the time to pay them off for good. If you’re not sure which debt to pay off first, consider the one with the highest interest. High-interest debt, like credit cards, can rack up through high-interest charges, late fees, and other penalties.
You can also use it to catch up on past due but not yet outstanding debt. For example, catch up on your electric bill or pay down the principal on your student loan. The sooner you pay it all off, the less burden you’ll have.
2. Start (or build) your emergency fund
If you already have an emergency fund, now is an excellent time to give it a boost. An emergency fund should consist of expenses for three to six months, which is different for everyone. If you think you won’t survive financially without a paycheck, put your tax refund in your emergency fund.
3. Start investing
Investing is different for everyone. It can be as small as micro-contributions through an app like Acorns, using a Robo-advisor like Betterment, or managing your investments yourself through an online broker like Robinhood.
Investing in your tax refund is a great way to increase your return. While a high-yield savings account has annual percentage rates greater than 2%, the average stock market return is 10%. While you could lose money in the stock market, you could also expect significant gains.
Investing comes in many different forms. Before signing up for a company, determine if you are a non-investor (best for Robo-advisors) or an involved investor (best for brokerages). Also, consider your risk tolerance and when you plan to use your money. Investing in the stock market is best for long-term investments or money that hasn’t been touched for at least five years. So if you plan to use your investment money soon, you may want to consider other options, like a savings account.
4. Contribute to your retirement account
Preparing for your future after your degree is over is one of the most important financial contributions you can make. If you have a work-sponsored 401(k) plan and don’t max out your contributions, use your tax refund to do so. If you’re over 50, use the extra money as a catch-up contribution.
You can also use it to start or fund your IRA. Whether you have a job-sponsored retirement plan or not, contributing to your IRA gives you an extra cushion in retirement. IRAs also have catch-up contributions, which is helpful if you’re age 50 or older and aren’t sure you’ve saved enough for retirement.
5. Start (or build) your HSA
A health savings account is a savings plan designed specifically for health-related costs. HSAs are a type of investment account, although they are called “savings” plans. If you have a high deductible health plan, you are eligible to open an HSA. HSAs are triple tax-free: your contributions, earnings, and withdrawals are not taxed.
7. Save for college
Whether you’ve put off college or want to fast-track your child’s education, use your tax refund to save for college. You have a few different options, like a high-yield savings account, an investment account, or a 529 plan.
A 529 plan is designed specifically for college savings. But it acts more like an investment account. Earnings grow tax-free, and as long as you use the funds for education-related costs, you won’t have to pay taxes on your withdrawals.
8. Invest in yourself
While college is a great self-investment, there are other ways you can use your tax refund for a good cause. If college isn’t on your radar, consider taking courses in a field or industry that interests you. If you’ve been contemplating a career change, use your money to invest in that change. This could be your opportunity if you need capital to start your own business.
Also, consider using it to give yourself a much-needed break. Whether it’s a vacation fund or just money for a massage or spa day, your tax refund can help you recharge, reset and refocus. It’s easy to get sidetracked into other materialistic things, like buying new clothes or shoes, but try to focus on what would improve your long-term well-being, not a quick fix.