A lot of people look at their tax refund as free money. Because of this they tend to splurge on things they don’t need. Unfortunately, tax returns aren’t free money at all – it’s in fact funds that you have worked hard to earn and have loaned to the U.S. government for the past year, interest free at that.
Looking to make the most of your tax refund? Here are 8 ways to use your refund smartly.
Build A Rainy Day Fund
Having a stash of emergency cash is the key to financial security. Take your tax refund and stash it in a savings account to fall back on in the event of an illness, auto repair or another financial blow.
Pay Off Debt
If you have any revolving balances on your credit cards, paying it down or paying it off with your tax return is one of the best ways to use your refund. Besides cutting down on interest payments, you’ll also get the peace of mind that comes with being debt free. Paying off some debt should also bump up your credit score as well.
Fix Up Your Home
Your home is likely your largest asset so you want to keep it in tip-top shape. Use your tax refund to invest in home maintenance and fix any lingering problems. Aim for large expenses that you’ve been putting off for years such as a new roof, plumbing leaks and cracked foundations.
Open A Roth IRA
Do you have a Roth IRA? Even if you already have a 401k with your employer, you should still open one up if you don’t have one. With a Roth IRA your money will earn interest, tax free. The real benefit comes from being able to withdraw your deposits any time you want, even before retirement, with no penalty.
If you’re under 50, you can put as much as $5,500 into your IRA. If you’re over 50 you can add as much as $6,500. So if you get a sizable refund, you can’t go wrong with putting money in a new Roth IRA.
Think About Education
If you have college aged kids or if you just want to start saving early for your little ones future, you can invest your tax return in their education. Instead of putting college funds aside in a savings account, store the money in a 529 college savings account instead.
With a 529 college savings plan you can use the money tax-free when it’s time for Jr. to go off to college. The interest you earn will never be taxed as long as you use the funds to pay for tuition, room and board, books and other school related supplies.
If you’re the type that has always wanted to give back but never had the budget to do so, your tax return may be the opportunity you’ve been waiting for. Give back to your favorite charity and enjoy a nice tax deduction the next time you file your return.
Start A Business
If you’ve ever dreamt of turning a hobby into a business, investing your tax return on your entrepreneurial instincts may be a good idea. If you only need a little seed money to get started, you can embark on an adventure that leaves you as your own boss.
As an added bonus, money spent on your business is tax deductible on next years’ return.
If you’re not sure what to do with your tax refund and none of the other options seem all that appealing, why not start a “dream fund”?
A dream fund is there to help you achieve your “someday” goals like traveling through Europe, going on a cruise, buying a new sports car or going back to school.
If you’re expecting a refund next year, how do you plan to spend (or save) it?