The most exciting part of tax season is the chance of getting a federal tax refund. About 75% of Americans who file taxes get a tax refund! Since you should not be including your tax refund in your monthly or yearly budget, this is extra money separate from income that you can use to do something significant to better yourself. If you get a tax refund or if you already received it, you should use it responsibly to help you achieve your financial goals.
1. Fund Your Side Hustle
Many people have a great idea that could end up replacing their main source of income entirely if they just had the time and money to invest in it. Start with a business plan and while you are still employed begin working on the idea in your free time. Use your tax refund to fund any resources you need to invest in to get the business off the ground. Or use it to save in order to get to the point where you can go all in and quit your job with several months of savings set aside.
2. Pay Off Debt
If you have high interest debt, such as credit card debt, you can save a lot of interest by putting your tax refund toward paying it off. Even if you can’t pay all of your debt with your tax refund, you can pay a chunk off and that will lower the amount of interest you’ll pay in the long run. Paying off credit card debt will lower your credit utilization ratio (which lenders like to see at or below 30%) ultimately improving your credit score.
3. Invest In Yourself
You are your biggest asset! So why not invest in yourself? You can control the return of your investment in your human capital. Enroll in classes or a certificate program to help advance your career. Or consider attending a work-related conference, getting a membership in a professional organization or paying for additional training so you qualify for that promotion. Remember that your experience and motivation contributes to the income that you earn and you can find ways to better yourself.
4. Start An Emergency Savings
A solid emergency savings should be about 3 months of your take home pay. You can start an emergency savings with your tax refund or add to your current one. It’s difficult to prepare for the unexpected but having peace of mind is worth it. In case you can’t work due to injury or illness or if your employer shuts down, you will have the money to keep food on the table and keep the lights on while you recover or look for a new job.
If you put your emergency savings in a high yield savings account, your money will grow with no work necessary. Credit Karma offers a high yield savings account with no fees or minimums. The annual percentage yield (APY) is 1.8%, compared to the national average of 0.09%. With a yield 22 times the average, your savings will be growing faster than most people’s.
5. Save For A Down Payment
Are you eyeing home ownership? If you’re like most of us who need to get a mortgage loan, a big must-have is a down payment. Use your tax refund to start or contribute to your down payment savings, which you can also put in a high yield savings account. The larger your down payment, the smaller your mortgage loan will be. The size of your down payment can also impact your interest rate, which is important for such a large loan. Remember closing costs are also something to save for in the home buying process so this can be part of your down payment fund.
6. Increase The Value of Your Home
Depending on what you want to do to your home you can do a handful of small improvements or you can pick one big upgrade like a new appliance or painting the house. There are easy and inexpensive ways to increase the value of your home that many people forget about when they are thinking of redoing their kitchen or floors. You can change your light fixtures to make your home look and feel more modern. Consider spending on landscaping to improve your home’s curb appeal. If you are looking to buy a home, learn more about what to look for to ensure your home’s value increases over time.
7. Fund An Individual Retirement Account
Contribute to your retirement savings by putting your tax refund in a traditional or Roth IRA. The earlier you start saving for retirement, the better off you will be when you retire. You can open a traditional or Roth IRA on your own, it doesn’t have to be through an employer like a 401(K). It may be hard to plan for retirement in your 20s or 30s, but now is the time to start saving. Learn why and how you should start saving for retirement in your 20s.
Instead of treating yourself and splurging on a big TV or a closet full of new clothes, consider putting your tax refund toward something that will improve your personal finances and help you achieve your financial and personal goals. Whatever you decide to do, make sure that you consider your options and feel good about your decision.
Financial freedom begins with good habits!
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