Do you have a tax refund coming your way? If so, now’s the time to start thinking of ways to invest the money. You could use it for short-term goals – like paying off or down debt or building an emergency fund – or you can start working on long-term investments like retirement savings.
If you’ve found yourself asking, what should I do with my tax refund this year, the most important thing is that you’re smart with the money and invest in yourself. Not sure where to start? We’ve put together 12 of the most innovative (and lucrative) ways you can maximize your tax refund’s value this year.
Read on for the best ways to use tax refund money to make financially-sound decisions when investing your hard-earned cash.
1. Pay Off Debt
Use your refund to pay off outstanding debt, like credit card balances or student or personal loans. Not only will this help improve your credit score, but you’ll also free up more cash each month to save for other investments. Plus, paying off debt can be incredibly satisfying. Remember to pay off high-interest cards and loans first.
2. Add to Savings for a Home Down Payment
Saving up for a down payment on a home is one of the smart-ways-to-invest tips that all savvy investors know. Even if you’re not quite ready to buy yet, putting extra cash towards savings now will give you an advantage when it comes time to purchase a house.
3. Max Out Your 401k Contribution
Many people wondering what to do with tax refund money don’t think about maxing out their 401k contributions for the year. Contributing as much as possible into your retirement accounts now means you’ll have enough money available later in life, when you need it most. And remember, many employers offer matching contributions, which can have a profound effect on your ability to save.
4. Open an IRA
Starting an IRA or a ROTH IRA is yet another good way to invest tax refund money. ROTH IRAs allow individuals under age 59 ½ years old who meet income requirements to contribute after-tax dollars into their account. ROTH IRAs are an attractive option for many investors looking to save responsibly now so they can benefit from their investments in the future.
Stocks and bonds can be a long-term strategy that you jump start by using your tax return funds. The stock market offers potential returns that can far exceed what you’d earn on traditional savings accounts. The caveat, though, is greater risk. However, when managed well, stock market investment strategies can yield significant returns.
Choose your investments wisely
Yes, planning to invest tax refund money is awesome, but making your money work for you is even better. Look for vehicles that’ll offer passive income (where you make money by doing nothing – think, buying income property so you can collect rent, or focusing on assets that pay dividends).
6. Evaluate How You’re Spending (& Use Your Return to Start Habits That Help You Save)
Adjusting some of your spending habits can be a win-win in terms of freeing up time and money. For example, if you start using a meal service, you might end up saving money on groceries.
7: Gift Your Return
Gifting part or all of your return can be a way to give back – and the donation might even be tax deductible. Whether you donate directly to charities or nonprofits, or you simply give family members and friends gifts during special occasions, there are plenty of options available depending on the impact you want your gift to have.
8: Transfer Balances to Cards with Rewards
Consider transferring any existing credit card balances to cards that offer cash back or point-rewards. Paying these balances off quickly is critical though, so you don’t incur more debt while you’re taking advantage of the rewards offered by the new card.
9: Add to Emergency Savings Fund
An emergency fund should always be part of your financial plan. You want to protect yourself from unexpected expenses that derail your goals. Not to mention, having an emergency fund will give you peace of mind knowing that money is available if you ever need it.
10. Open a Certificate (AKA Certificate of Deposit, or CD)
A certificate of deposit (CD) – or just, certificate – can be an option if you’re wondering what to do with a tax refund. Certificates offer higher rates than traditional savings accounts, and they come with NCUA insurance, so your principal investment amount is safe even during economic uncertainty. Certificates require minimum deposits and typically have fixed terms ranging from 3 months to 5 years.
11. Invest in Yourself (Your Education or Business)
Have you considered investing in yourself by furthering your education or starting or growing your business? Doing so could lead not only to increased income, but also provide future tax deductions which can ultimately increase overall savings over time. Additionally, investing in yourself helps build personal and professional confidence, something we all strive to achieve.
12. Improve Your Home
Updating to energy-efficient appliances will save you on energy costs in the long run. And improving curb appeal can add to your home’s value if you ever sell.
It’s important to consider all the smart ways to invest your tax refund money. Paying off debt and adding to your savings are both great options. Or, use your return to build an emergency fund, make home improvements, invest in stocks, contribute to retirement accounts, and more.
Whatever you decide to do with your tax refund money, make sure it benefits you financially in the long run. Do some research and consider your options, and you’ll make the right decision.
If you’re still trying to figure out what to do with your tax refund, you can always start by opening a savings or money market account at Island Federal Credit Union. With competitive rates on checking accounts, savings accounts, loans, and more – we have something for everyone! Our knowledgeable staff can help you make the most of your money. If you’re ready to take control of your financial future, let Island Federal Credit Union be the first step you take. Reach out today to get started.