We all look forward to our annual tax refunds. Most people, though, tend to think of it as free money, or a yearly bonus. They don’t put much thought into how they will spend it and let spontaneity take over. But a tax refund isn’t really free money. It’s money that you’ve worked to earn. So, why not make it work for you?
According to the Internal Revenue Service (IRS), the average tax refund in 2022 will be $3536, a 23% increase from 2021! On the other hand, even if it is not a lot, spending your refund wisely can come with some perks. Here are some ideas on how to get the most out of it.
1. Pay off your debt.
The first step towards accelerating your wealth creation journey is to be debt-free. Today, two kinds of debt really stand in the way: student loan debt and credit card debt. Make sure to put your extra cash towards debts with the highest interest rate, and work backward from there.
2. Fire up your emergency fund.
It’s advisable to stash 12 months of living expenses in case of an emergency such as job loss, or sudden hospitalization. If you’re still building up your emergency fund, put some or all of your tax refund towards it. You’ll sleep easy knowing that your fund will protect you on a rainy day.
3. Prepay your home loan
This is a great option, especially if you plan to retire early (this is code for only doing work you love, while your investments work for you!). Paying off your mortgage before retirement is the advice of the top Financial Independence Retire Early (FIRE)/financial freedom advocates.
4. Invest and grow your money
If you haven’t started investing yet, put your refund towards a traditional or ROTH IRA. If your IRA is maxed out, then consider investing in mutual funds, stocks, bonds, and other investments like crypto, to diversify your portfolio. Make sure you invest in instruments you understand.
There are tons of learning resources available that will get you up to speed. Research, then invest.
5. Invest in Yourself
If you’ve checked off all the boxes before this one, then consider investing your refund towards learning a new skill, pursuing a passion, or taking a step towards your side hustle. There are lots of online courses—from coding to becoming an ace at managing your finances. Think of it as an investment in yourself, and not a cost. The impact of your learnings compound over time!
6. Treat Yourself!
Consider splurging up to 10% on something fun—it could be a short trip, a new outfit, or a gadget. You could also use it to gift something to your favorite person, donate to a non-profit you care about or a Kickstarter campaign that inspires you.
It’s ideal to factor in your yearly tax refund when creating your annual budget. This way, you can plan how to leverage it in the best way possible, and not blow it on ad hoc spending. For more tips on how to manage your finances cleverly, reach out to Briteside Solutions today!