Are you one of the millions of Americans getting a tax refund this Spring? It’s not every day that you get a financial windfall. Whether your tax refund is $100 or $4,000, it can be a financial lifeboat. Here are a few creative ways to use your refund to be financially successful this year.
1. Build an Emergency Fund
Nobody can predict the when you’ll have a surprise expense that requires you to dip into your savings to pay. Way too many Americans would struggle to afford a $400 emergency, so starting an emergency fund should be priority #1 if you currently don’t have three months of living expenses in a bank account.
Keep this money separate from your daily checking account that you pay your monthly bills and make debit card purchases with. If you’re like me and the money is in it, you’ll forget that you can’t spend $X because it’s for emergencies only and spend it anyway. Then, when you really do need it, it won’t be there.
Putting the money in an online bank account that earns 1% interest can be the best place to keep your emergency stash. It’s out of sight and you earn an interest rate 10 times higher than what the average bank or credit union pays.
2. Pay Off Debt
When your emergency fund is already funded, making an extra debt payment could be the most efficient use of your tax refund. Use your refund to pay your highest interest rate first; if you have a credit card with a 20% APR and a student loan with 6%, pay the credit card first. Not only will you save money by paying less in interest, but your credit score increases once the balance is paid off.
3. Put It In Savings
Maybe you don’t know how to spend your money at the moment. Instead of letting it burn a hole in your pocket and buying something you don’t need, put it in your savings account so it can at least earn interest. If nothing else, you can use the refund for one of these ideas listed below when you are ready to spend it.
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4. Invest Your Tax Refund
If you don’t plan on using your tax refund in the immediate future, you can invest your refund—or at least a portion of it—into individual stocks, mutual funds, or ETFs. Most experts recommend only investing money you don’t plan on needing for at least a year, but preferably the next three to five years.
This is because if you sell any profitable holdings within a year of purchase, the gains will be taxed at your normal income rate instead of the discounted capital gains rate of 15% or 20%. Also, we can’t accurately predict when a stock market correction will occur. In February 2018, the broad market declined 10% in a week’s time causing a $2,000 investment to decline $200 in value almost overnight.
5. Save for a Home Mortgage Down Payment
To avoid paying private mortgage insurance when you borrow money to buy a home, set aside your refund to be a portion of your 20% down payment. Otherwise, you will have to pay PMI until your remaining home mortgage is less than 80% of your home’s appraisal value.
For example, you PMI ends when you have paid the lender at least $30,000 for a $150,000 house. Your down deposit counts toward the 20% equity mark.
6. Make a Lump Sum Insurance Payment
Some homeowner’s, renter’s, and automobile insurance providers offer a discount when you pay for your insurance all at once. Your potential savings can be the equivalent of one month’s premium. If you’re not sure if your insurance provider provides a discount, call and ask them.
7. Fund a 529 College Savings Plan
Do you know how you’re going to pay for college? Putting your tax return into a tax-free 529 college savings plan is one way to do it. The contributions are invested and can be used for undergraduate and graduate educational expenses. If your older child ends up not using all of his 529 balance, the remaining funds can be transferred to a younger sibling.
8. Do Home Repairs
Have a leaky roof or another home repair that needs to be completed? Your tax refund can pay for the repairs without dipping into your savings. Also, ask your hardware store if they offer a project starter discount–Lowe’s and Home Depot can give you a one-time discount that can help you save a few dollars.
9. Invest in Yourself
There are several different ways to invest in yourself:
You can use your refund to enroll in a course to learn a new skill that helps you earn a promotion or start a side hustle. Or, you can use it to buy new equipment like a computer, design software, or a machine to begin offering more services and to become more efficient with your current workload.
To invest in your physical or mental health, you can consider joining a gym or buying a home workout system. Being in good shape and eating a nutritious diet is essential to being healthy and productive at work and at home.
10. Buy a Cheaper Car
Cars are depreciating assets that lose value every day, but you still need a car to get to work and run errands around town. Ideally, you should sell your current vehicle and use a portion of the proceeds to buy a cheaper car. Then, you use the remaining money to put into savings or pay off another debt.
However, sometimes you don’t have the time to be without a car and still go about life. Sure, you can rent a car but that can get expensive in a hurry.
If you have your eye on a good used car that’s selling for a discount, you can use your tax refund to buy a car without a car loan. Then, you just have to be sure to sell your current car and use the money to pay off debt or boost your savings.
Your tax refund technically isn’t “free” money, but it’s the next best thing. Instead of spending your tax refund before you even know how much you’re getting back, think about using it for one or two of these suggestions instead. Even if it takes you six months to decide how to use your tax refund, it’s better than spending it on something you don’t need.