How to Make the Most of Your Tax Refund
As an employee, you know that taxes are automatically withheld from your salary before being credited. But, it is often the case that the withholdings exceed your tax liability. When this happens, expect to receive a tax refund in the weeks following your tax filing. According to US News, the average tax refund amount can be upwards of $2000. If you’re wondering about some great ways to put this cash to use, this article by The Money Nerve has got you covered.
Build an Emergency Fund
To safeguard yourself from financial difficulties during unforeseen circumstances, having an emergency fund is important. As a rule of thumb, your fund should include an amount enough to cover expenses for 2-4 months. If you currently have an emergency fund, your tax refund can be a notable addition. Conversely, if you are yet to create a fund, putting a couple of thousand dollars away at once will serve as a good start.
Instead of keeping your funds in a normal savings account that provides low returns, consider the following options:
Pay Off Debt
If you have outstanding debt such as a mortgage, credit card payments, personal loans, etc. utilize your refund towards its repayment. The longer time you take to repay debts, the larger the amount becomes, especially in the case of credit cards as the amount will keep increasing with regular use. When prioritizing which debt to pay off first, choose those which provide no tax benefits. For instance, as reported by the Tax Policy Center, interest payments on mortgages are tax-deductible, hence these can be paid off after other debts.
If you already have strong finances, the refund can be used towards building your investment portfolio. For quick gains in the short term, investing in debt funds is a good option. But, if you have a long-term perspective, equity funds and stocks are the way to go. Individuals who want a safe bet for growing their money over the long term without much need of supervision should opt for index funds. Additionally, you can use your refund as a yearly contribution towards your corpus, allowing you to increase your capital and returns.
Invest in Yourself
Use your tax refund towards learning new skills or developing expertise in the field of your choosing. This can include:
- Enrolling in certification courses
- Paying tuition of a higher education degree program you’re currently pursuing
- Joining a professional organization that provides you access to networking events, seminars, and other online resources
Similarly, you can choose to invest in activities towards improving your health and lifestyle, such as:
- Buy a gym membership, or enroll in dance/music/sports classes
- Plan a family vacation
- Make healthy home improvements
Acknowledge that that thing you went through is actually still playing havoc at a subconscious level. To the point, it’s potentially impacting your relationships, your money story, just that understanding is the freedom. So for me, that was it. It was, why do I do it like this?
Fund Your Business
If you’ve recently chosen the path of self-employment or started a side-gig, use the tax refund towards improving your business. This can include:
- Purchasing raw materials or inventory.
- Paying for subscriptions of software you can use for marketing, inventory management, accounting, customer relationship management, and more.
- Hiring freelancers to help with projects you need expertise in.
- Investing in promotional activities to create awareness about the business, such as running ads on social media, creating flyers to be posted in the neighborhood, and printing business cards for sharing with prospective clients.
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Given that tax refunds are no nominal amount, it’s best to have a strategy in place regarding utilizing the funds for the present or the future.
Katie is the creator of Advice Mine. She enjoys writing about lifestyle topics and created the website to share advice she has learned through experience, education and research.