The smartest things to do with your tax refund
How to invest in yourself now, according to financial experts.
April showers are in the forecast and that means it could be raining dollar bills for those with a tax refund on the way. As tempting as it may be to blow your whole wad from Uncle Sam avoiding COVID on a cruise or a buying a Cameo from Baby Yoda, you might actually feel better about taking steps to turn your mini windfall into longer term financial success.
Before you spend a dime of your tax refund (too late?) take a beat to decide your financial pain points, priorities, and goals for the future. Are you drowning in debt? Is your emergency fund on life support? Does the term “retirement fund” fill you with rage?
What about career goals? Do you feel like you’re on the right path, or are you spinning your wheels at a dead end?
Investing in yourself can mean a lot of different things, especially for millennials. Mic went to the experts for advice on the best ways to make the most out of that refund check.
Pay down high interest credit cards
“If you’re looking to turn your tax return into more money, pay down high interest debt,” says Bobbi Rebell, a financial literacy expert and certified financial planner. She says paying down high interest credit card debt should be a top priority for those with a tax refund coming in. “Interest rates are going up and it’s getting more expensive to carry debt. The average credit card APR is 16% and rising, so paying your credit card off is like putting money back in your pocket. Then you have extra cash every month to put toward other financial goals.”
Take a few minutes to play around with an online debt calculator and see how much you’d save by throwing your entire refund at your high interest debt. Depending on how much you owe and how much you can pay down, you may be saving double or triple your money by not having to pay interest on the debt over the next several years.
On top of that, reducing the amount of credit you’re using can boost your credit rating creating a domino effect of financial positivity. Better credit means better credit rates on future loans.
Establish emergency funds
There’s a soul-crushing old saying that everyone should have six months salary saved in their bank accounts in case of emergency. While this goal may feel completely out of reach for those of us without a bucket of gold doubloons lying around, there’s still something you can do to give yourself an emergency cushion for unexpected expenses.
“When you have an unexpected car repair or an unforeseen medical expense, your emergency fund is the buffer between you and debt,” Rebell says. “Taking on debt to solve a problem leads to more financial challenges. Use your tax return to give yourself savings to fall back on when life happens.”
Adding anything at all to your emergency fund can make a huge difference in the long run, especially if you look into opening a high interest savings account where you can earn interest while you’re waiting for your next emergency to show itself.
Start planning for retirement
Some millennials may feel their headed for an expected retirement age of 163, but even a small investment in your millennial years can go a long way in saving for your golden years.
Christie Malmborg, a financial advisor with 12 years of experience helping clients build their wealth, recommends investing your tax refund in an IRA. If you haven’t filed your returns yet, you can still make a retroactive contribution through April 15, 2022 and that’s likely to reduce the taxable income you made in 2021 which will also increase your refund.
“You can contribute up to $6,000 or all of your income, whichever is lower,” says Malmborg. “The average tax return would be a great head start to contributing the maximum this year.
Pimp your ride (or at least, fix it)
If you say a little prayer every time you turn on your ignition in the hopes that your car will start, Malmborg says putting your tax refund towards overdue auto repairs is a smart bet.
“Maybe your car needs a tune-up but you’ve been trying to avoid forking over the cash. Many times a repair like that will keep your car running better for longer. A tune-up can also increase your gas mileage. With gas prices where they are, that could translate to more cash than you think.”
Invest in your career
If you’re stuck in a low-paying gig and dreaming of a career in a different field, using your tax refund to pay for a class, professional training, or starter funds for your own small business can be your first step towards making more money. They say money can’t buy happiness, but if your self-investment leads you to a happier overall career path, it can put you in a mentally a