For many people, it is tax refund season. The time of year when American taxpayers get to see a portion of their hard-earned money returned to them. Even though you promised yourself last year how not to spend your tax return, you went ahead and bought the new PlayStation. The year before your tax return was spent on a 75 inch flat-screen HDTV. Well, now’s your chance. It’s a new year and you have another opportunity to save your tax refund and put it to good use. Putting it in your savings account is not the only option, but it’s a good start. Here are 4 other options to consider making the most of this year’s tax return:
1) A Step Toward Financial Freedom
If you have been slowly paying off credit card debt and barely making a dent in it, there is a good reason. Take a hard look at your monthly statement. A big chunk of your monthly payment is going to fees and interest compounding against you month after month after month.
If you have credit card debt, the best investment you can make is to use your tax refund to pay it off or pay off as much as you can with the refund. Cutting off or into the interest rate is money in your pocket (the lower the card’s balance the lower the interest rate charge). You could also rollover the amount of your current card into a balance transfer card with a lower interest rate and then use your tax refund to pay that down.
If you were considering putting the refund in a retirement account instead of paying off your credit card balance, don’t. Realistically, putting your money into a fund that’s yielding 4% or 5% interest rather than paying off a credit card charging you 18% interest is a losing proposition. Once the credit card is paid off, then start building the retirement fund with the amount you paid the bank every month.
2) Contribute to Your Retirement Account
If you are not carrying outstanding credit card balances, then outing the tax refund into a retirement account is a good way to make the most of your money. No matter your age, the sooner you start, the more time there is to build up the retirement account and see the benefits of compound interest. There are many funds to consider and read up on— 401(k) through your employer, a traditional IRA (individual retirement arrangement), a Roth IRA, there even a number of apps now like Merrill Edge and Robinhood that allow you to build a portfolio on your terms. Some of the earnings on investment are Tax deductible.
3) Create an Emergency Fund
Creating a fund in the event of an emergency expenditure can help you from creating debt. A sad truth about modern American life is that close to 80% of workers live paycheck to paycheck. It’s nearly impossible to set money aside for any type of contingency without going further in the hole. It could be new brakes for the truck, an unexpected healthcare bill, or another round of layoffs lands you in the unemployment line. Financial advisers say to put aside enough of an emergency fund to cover at least three months of expense. Whether or not that’s possible for most Americans is up in the air, but dropping your tax refund into an account is better than starting from zero.
4) Kick Start a Career or Side Gig
If you have been working a side gig that needs cash infusion or need to complete a certification course to boost your career (and options), consider using your tax refund to finance either. If you have a few skills or are developing them—whether it is computer repair, selling real estate, or plumbing—certifications are required not only because of the law but as a valuable learning tool. You might also be able to take advantage of the Lifetime Learning credit and deduct some of the cost from next year’s taxes.
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