7 Best Ways to Use Your Tax Refund to Build Wealth
Wondering what to do with your tax refund this year? Do any of these 7 tips to increase your wealth.
Tax season is upon us. Although the government is shut down currently, the administration has assured us that we will get our tax refunds on time. Thank the starry heavens! If you’re getting a tax refund, you might be wondering: how much will get, when will I get it, and what should I do with it. We’re going to answer these questions so that you can take advantage of your tax refund and build wealth.
HOW MUCH WILL MY REFUND BE?
You can use an online tax refund calculator to estimate your 2018 tax refund. I like to use H&R Block’s calculator because it’s very easy to follow along. All that you really need is your 2018 income, federal taxes, state taxes, and/or local taxes to get a basic view. Remember that the more accurate the information you put into the calculator, the more accurate your estimate will be. If you want to wait to see what your refund will be, you can just see it when you file your return.
WHEN WILL I RECEIVE MY REFUND?
The earliest that you can submit your tax returns is January 28, 2019. The deadline for the majority of the country is April 15, 2019. Typically you should receive your tax refund within 21 days (3 weeks).
The College Investor has a great chart that estimates when you should receive your return here.
HOW SHOULD I USE MY REFUND?
So you finally have your return. How should you use it to ensure your prosperous financial future? You’ll see these 7 ideas either fall into the save, pay off debt, or invest category, which is the magic mix to building wealth. This list should be followed in order. If you don’t need to do step 1, go to step 2. Do this until you make your way down the entire list.
Add money to your emergency fund
You will regret not having enough money in your checking account when there is an emergency. I know I did when I had to pay $250 to fix my car after Thanksgiving break. I suggest having at the very minimum a $1,000 emergency refund, as suggested by Dave Ramsey. Psychologically, you will feel safe with this amount in your bank account. After you have paid down all your debt, then build your emergency fund to 3-6 months of your expenses.
Pay off Credit Card Debt
You should start with paying off your debt, but not just any debt. You should focus on paying down your credit card debt first because it most likely has the highest interest rate out of all your debts. CreditCards.com reported that the national average interest rate for credit cards is 17.41% as of January 9, 2019. You don’t want to ever be paying interest. If your in a hole, and have been paying interest on your credit card for months or even years, stop the cycle right now. Put that money towards paying off the full balance of your credit card and free yourself from the chains of the lenders.
Pay off Student Loan Debt
Student loans are next in the payoff debt plan. Private student loans can have interest rates ranging from about 5.29% – 14.46% on average. Federal student loans can range from about 3% – 8% on average. There’s a reason that we’re having a student loan debt crisis. But get out of your own personal crisis, and take a step to getting out of your own student debt nightmare by putting a portion or all of your refund to paying down the debt.
4. Pay Off Car Note
Look. A car is a depreciating asset. The second you drive it off the car lot, it decreases in value. Yes, cars are cool and practical, but you need to be practical about your money too. Don’t let having an expensive car drag you down. Use your refund to pay more on your car note so that you will not have to pay more interest. The average interest rate for a car loan for 60 months is 4.21% (ValuePenguin.com). Again, don’t be a slave to a lender.
5. Pay Extra On your Mortgage
You are one of those lucky ones that actually got to buy a house because you got your debt under control. Consider using your refund to make extra payments on your mortgage. Putting an extra thousand towards your mortgage today could save you thousands in interest in the future. Bankrate.com reported that the average interest rate for 30-year fixed mortgages is 4.63% as of January 9, 2019. The beauty of you paying extra on your mortgage is that you will be building equity. It’s not like paying down your debt where you go from negative to 0. This is like you going from negative to positive immediately. That dollar is not the bank’s anymore, it’s yours.
6. Put in Savings for an Investment
This is the perfect time to put this money in savings for a major investment you want to do in the future. Maybe you want to put your refund in savings towards a downpayment for a house. Maybe you want to put your refund in savings for money to start your own business. Your refund could allow you to invest in a friend’s business. Whatever it is, tax return season is the perfect opportunity to evaluate your financial goals and make strides towards them, especially when it has to do with investing.
7. Invest in a index Fund
Not saving for a huge investment? Invest that refund in a good ‘ol index fund. Don’t try top pick the next winning stock. It’s very hard to predict who’s the next Amazon. Instead, opt for the passive index fund that follows the S&P500, which has an average annual rate of returns of 9.8% over the past 90 years (Investopedia.com). That’s money in your pocket. This year if you can make your money work for you and don’t work for your money. Invest that refund.
What are you going to use your tax refund for? Comment below.
This post contains content this is for informational purposes only, and should not be considered legal or financial advice. Please read my Disclaimer for more information.
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