7 Savvy Ways to Use Your Tax Return
We all know taxes aren’t one of the joys that come with adulthood, but tax refunds can be a welcome reward for completing this annual chore. No matter how large or small your tax refund for this year, it’s always a good idea to have a plan for that cash instead of letting it burn a hole in your pocket.
7 Smart Things To Do With Your Tax Refund
The average tax return for 2020 was $2,714. If you qualified for the Earned Income Tax Credit, you’d be getting even more cash. That’s a hefty chunk of change that can be put to work, helping you get ahead financially. Here are some ideas for what you can do with your tax return.
1. Pay Off Debt
While paying off debt might not seem glamorous, it’s an essential step to living that financially free life. You’ll want to focus on the debt with the highest interest rate first. This is most commonly credit card debt and personal loans. If those are paid off, nice work! You can still apply your tax return to other debt you have, including student loan debt, or choose to focus on savings and investments.
2. Save For An Emergency
If the trainwreck of 2020 taught Americans anything, it’s to be prepared for the worst. If you haven’t established an emergency fund, your tax refund is the perfect first deposit. Financial experts recommend having 3 to 6 months’ worth of expenses saved for the unknown.
3. Build A Sinking Fund With a Specific Purpose
Have you ever had a big bill hit you out of ‘nowhere’? The reality is, you probably had an idea that you’d need to pay it, but you just hadn’t planned for it. That is where sinking funds come in. Sinking funds are a strategic way to save a little each month for a specific purpose. For example, you might know your water heater is going to break down at any moment.
To avoid a surprise monster bill, drop that tax return into a sinking fund, so it is standing by. Having a sinking fund like this allows you to avoid dipping into your emergency fund or using a credit card and racking up debt.
4. Contribute More To Your Retirement Accounts
Jumpstart your annual retirement contributions by dropping your tax refund into one of your existing accounts. IRA accounts allow an annual contribution of $6,000. If your return was around average, you would be almost halfway there to maxing it out. Talk about a major money-savvy move for future you.
5. Open a New Investment Account
Consider opening a new investment account to continue building wealth. The Fintech space has some incredibly forward-thinking options – including Finch. Our hybrid account combines the convenience of a checking account with the returns of an investment account. Your money is automatically invested based on your risk profile, but it’s also available to spend whenever you need it.
6. Invest in Yourself
Use the cash to level up your skills. You can enroll in a course or sign up for a conference. Consider how spending this money might help you and your career – maybe it will even help you land a better paying job. Cha-ching!
7. Splurge, Just A Little
Life is about balance, and that means splurging occasionally. While you probably shouldn’t drop your entire tax refund on a shopping spree, put aside a small amount to spend on yourself for something fun. Why is this a smart idea? Because it is a healthy practice to spend and save. A periodic splurge can help keep you focused on your goals.
Find Out How Much Your Tax Refund Might Be
You can get an estimate for how much your tax refund might be by using a tax return calculator. You will need to input some basic information, including:
- Your age
- Your tax filing status
- Number of dependents and family situation
- Your earned income
- Deductions (i.e. medical expenses, retirement contributions)
- Credits (i.e. education and child care expenses etc.)
Of course, the most accurate way to calculate your tax refund is to file your taxes with a tax professional or tax filing software. Once you file (and the IRS starts processing returns, around February 12th), you can expect that return within 21 days, and then you can put it to use using some of the suggestions above.
One Last Piece of Advice: Adjust Your Tax Withholding
A big check feels good to get, but if it’s especially high, it means you’ve been giving the government too much money. They shouldn’t get a free loan from you, and that money could increase your monthly income and be put to work earning interest or returns. To adjust your withholding, start by taking the IRS Tax Withholding Estimator. Then, you can use this information to speak to your Human Resource department about changing your tax withholding information for the current year.
If your hold-up is the ‘forced savings’ that comes with a tax return, consider setting up an automated deposit to your Finch account every month. This way, you keep control over your money while putting your money to work!