Congratulations! You’ve finished your tax return and you’re now patiently waiting for the tax refund to hit your bank account or mailbox. What are you going to do with that money? Do you already have plans on impulse spending most of it? If so, please stop. Like, really. Read this post and consider a few more responsible options. I want to help you make the best decision for your long-term financial health.
To keep things simple, I’ve devised a list of just five alternatives to spending your tax refund. Those are saving (duh), diversification (the non-investment type), loan interest payments, continued education and investing.
Tax Refund Option #1: Savings
I know this isn’t the sexiest option but savings come in handy. Whether you’re at a “struggling college student” state or have a pretty cushioned job with steady cash flow coming in, savings can and will come in handy when you least and most expect it.
Side story: A few months ago I requested a weekend off from work and also got sick another day within the same week. Mind you, I was only part-time when this happened, so no PTO for me. My plans were thrown way off and the following check was soooo sad. I had to dip into my savings for monthly expenditures, but I was ABLE to dip into my savings because I had it. Therefore, I was prepared for this unexpected moment and didn’t miss a beat with my finances.
But also, there are tons of dreams that we all have that savings can help us reach. I grabbed this info from the Forbes Level Up e-newsletter and I found it very enlightening…
“Escaping debt and saving money are key, so commit to setting aside cash whenever possible: $35,329 for getting married, $45,000 for buying a home, $233,610 for raising a child, $35,000 for grad school or $30,000 for starting a business.”
That’s a lot of money right? A windfall from something like your tax refund will put you on the right path to reaching these hefty spending goals others.
Tax Refund Option #2: Diversification
This is my favorite option because you still get to have a little fun with your money spending wise. I’m definitely a proponent for spending. It stimulates the economy right? And we don’t want another recession right? As long as it’s not “on credit”, you’re good. However, there still needs to be an element of long-term financial health within your decision. Think of your rent or mortgage payment as an example. You’re not going to pay just half of it at the beginning of the month with the expectation of that being good for the whole month, right? You will make the full investment in return for the security that you’re housing is set for the entire month.
This is a very simple and juvenile example but that’s how essential you should look at your immediate and far-off financial future. If there are family trips, annual vacations, big ticket wishlist items all on your “money to-do list”, you have to make the investment TODAY to get things rolling.
With that being said, this option is more flexible for those who have many financial goals that need a head start. Consider the following:
- 20% spending
- 50% savings
- 30% towards big ticket wishlist items
Tax Refund Option #3: (Student) Loan Interest Payment
Most of us, unfortunately, have to worry about good ole’ Sallie Mae and returning to her what helped us earn our degrees. One thing that most of us forget is the interest that accumulated over those years! This raises your loan debt significantly and draws out your repayments as well. If this is of big concern to you and you want to pay down your student loan debt ASAP, apply part or all of your tax refund to the loan interest. Even better, if you are already making post-graduation payments, you can make payments on the principal. By making additional payments to your principal loan, your overall money due and added interest will be lower as well. You’re welcome.
Tax Refund Option #4: Continued Education
I know that more school is the last thing you want to hear about, but hear me out! Obtaining an additional degree, certification or program/software proficiency can have positive effects on your career growth. Want to make yourself indispensable at work? Or maybe even earn a salary increase by December? Level up your skillset! This can be done through classes at your local community college, joining a concentration on Coursera, completing a full skills course on Lynda, or simply Youtubing a topic all day. This sometimes takes a fiscal commitment, especially if you want something more formal and reputable than Youtube. What better way to put your tax refund to good use by investing in your career?
Tax Refund Option #5: Invest
These are both topics that are not too popular with 20-somethings and even millennials as a whole, and it should be! I’m sure you know, but the earlier you start saving and investing, the larger the payout will come at retirement. I don’t know about you, but I plan on chilling come like 50! That’s only possible if I hardcore invest and save starting now! The key to growing your hard earned small paychecks is by turning around and investing it. This provides the largest return in today’s economy.
Investing can be such an abstract topic but there are groups out there dedicated to making it simple and worthwhile for anyone! I really like Acorns and Ellevest. Acorns allow you to invest small amounts from everyday spending and Ellevest helps women outline an investing portfolio based on savings goals. They both also have awesome blogs with financial advice.
Tax Refund Bonus Option: New Business Idea
I am also a big fan of entrepreneurialism and supporting it. If you have a cool idea that you’d like to pursue, using your tax refund as an initial investment may be that small push you need. It can be daunting to look at startup costs even for a small, online business. However, having the extra funds to take that step may pay off in the long run once you start making money from it!
Tax Refunds Are For Investing
A theme you can probably trace throughout the blog post is to invest into your future with your tax refund. It may seem more glamorous for 2.5 seconds to spend it all on things you’ve been drooling over, but the investment is well worth it. Who knows, maybe when next year’s tax refund comes in, you won’t be in dire need of spending it, but it’ll add to your long-term investment all the more!
So now that you have these skills I challenge you! Create your ideal budget for your tax refund and determine how it will contribute to your long-term financial health. If you’ve received it already and made your decisions, double back and see how successful you were. Are there other ways you can improve your long-term financial health? Tweet me your new goals once you’re done!