Internal Revenue Service statistics show that in the past two years they have sent out around 40 million tax refunds each year. If you are one of the lucky millions expecting to receive a refund this year, you may be trying to figure out how to use your tax refund the smart way. Here are several options for you to consider:
1 Wait until It’s in the Bank
Have you ever heard the expression, “Don’t count your chicks until they’ve hatched?” It’s true for many things, including tax refunds. Don’t book a non-refundable vacation or go on a shopping spree simply because you are expecting a good sized refund on your taxes this year. One reason not to do this is because your refund could fall short of what you have anticipated resulting in debt. Some better uses for your refund are listed below. Please read on.
2 Start Some Sinking Funds
A sinking fund is an account you have opened for a specific purpose to be used at a future time. You “sink” your money into this account to build a “fund” to be used for whatever purpose you have chosen, such as an emergency fund, a car fund, or a home improvement fund, just to name a few. Online there are banks that allow accounts to be set up that will pay you interest with no minimum balance and no fees, which are perfect for sinking fund, and a great way to invest in your future needs.
3 Pay Off Debt
Paying off debt is a great way to use your tax refund. A good way to decrease your debt the fastest is to start by paying all or as much as you can of whatever debt has the highest interest rate. Then proceed to the next debt having the next highest interest rate and so on. Next, resolve not to accumulate more debt and follow the same process of debt reduction next year. Continue to do this for several years and you should gain some financial freedom.
4 Invest
There are many different ways to invest your tax refund. For instance, a few ways you could invest are real estate, stocks, bonds, or a Roth IRA. The degree of risk associated with each type of investment differs, so research each to ensure you are making the best choice for your investment dollars.
5 Home Improvements
If you want the greatest return on your investment dollars, think about using your refund for basic maintenance such as siding, a new roof or a new energy efficient furnace rather than a new updated kitchen with all the bells and whistles. Of course, if your home is already in good condition, you could instead use your tax refund to make some updates in other areas. Keep in mind the current value of your home as well as others in your area. The current housing market in your neighborhood will also affect the value of your home. Before doing any remodeling, research other homes in the area in order to make decisions that will give you the greatest return on your investment.
6 Start a College Savings Fund
Another good use of your tax refund dollars would be to start a college saving fund for your children or grandchildren. You can open a 529 plan and save tax dollars on the earnings as well as on any money taken out for college expenses, as long as you follow all of the rules of the plan. The plans vary from state to state, so look everything over carefully before making your decision.
7 Start a Business
Using your refund to start a business could give you an enormous return on your investment if you make sound business decisions. Do your homework before you spend any money and avoid anything that sounds like a get rich quick scheme because if it sounds too good to be true, it probably is.
Hopefully the tips we have provided will enable you to use your tax refund this year in a way that will give you greater financial security in the future.
Do you have other ideas of how to use your tax refund the smart way?
Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.