If you’re part of the 54 percent of American taxpayers anxiously anticipating a tax refund this year, you should have an action plan for that money once it hits your bank account.
According to the IRS, the average tax refund last year was $2,860. That’s a nice chunk of change that can have a huge impact on your finances if you choose to use it wisely!
Don’t get caught treating your refund any different than your regular pay. (Remember, that money originally came from your paycheck anyway!) Before you let it burn a hole in your pocket, take a minute to think about how it can benefit you the most. Think about your personal financial situation and evaluate what your money goals are long-term.
Here are five smart ways to invest your tax refund and grow your financial wealth.
1. Start or increase an emergency fund.
There is nothing quite like the comfort of knowing you have some financial security. Without an emergency fund, one big expense can send you on a downward spiral toward financial disaster. Nothing beats knowing you are covered if something unexpected happens.
A good rule of thumb is to stash away six to eight months’ worth of savings. Since saving up that much money can take quite a while, using your tax refund is a great way to get there at a faster rate.
2. Focus on paying off high-interest debt.
After establishing an emergency fund, the next best thing you can do with your tax refund is paying down high-interest debt. This includes credit card balances, title loans, student loans, and any money you still owe on your vehicle.
Put your refund to work by starting a debt elimination program, like Consumerism Commentary’s Debt Avalanche. This method encourages you to put any extra money (aka – your tax refund) toward a loan that carries the highest interest. Getting rid of that payment as fast as you can ultimately reduce the amount of money you pay for it in the long run.
3. Fund your retirement.
Consistently contributing to a 401(k) or IRA account is essential to ensuring you can live life comfortably once you retire. If you consider a tax refund “extra” money, what better way to increase your retirement fund without taking dollars from your regular paycheck?
Using your tax refund to purchase or boost a Roth or traditional IRA will help you gradually increase your wealth. Think about it this way: if you put $2,500 from this year’s tax refund into an IRA, it will grow to $8,500 in 25 years at a 5 percent rate of return. If you continued to save that kind of money, you’d end up well over $100,000 to spend freely in retirement.
Trust us, eventually, you’ll be happy you saved for retirement rather than having spent that money on something you no longer use.
4. Invest in stocks.
This option is a bit riskier than the others, but it’s another opportunity to potentially grow your money tree.
However, if the idea of investing your full tax refund in a few stocks leaves you feeling uneasy, simply take a small amount that won’t hurt you if you lose it. That way you still have some left to put toward a more conservative option.
5. Purchase more life insurance.
For many, life insurance is easy to overlook. This is often especially true for younger individuals who are confident they have more than enough time to worry about it. But, a term life insurance policy can provide substantial financial stability for your family – or future family.
It’s the perfect way for you to continue to provide for your loved ones and help them maintain their standard of living if something unfortunate happens.
Give your money a purpose.
The bottom line – if you get a tax refund this year, make sure whatever choice you make is the smart move for you.
The best way to continually grow your wealth is by giving your hard-earned money the opportunity to work harder for you, regardless of which specific route you take.