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Maximizing Your Tax Return’s Value
Sometime in the next few months, many millions of Americans will file their taxes and a large portion of those Americans will receive a tax refund check after they file, giving them back the extra money that had been taken out of their pay beyond the taxes they owed.
It’s a pretty nice feeling when you open the mailbox and there’s a nice check in there, or you peek at your checking account and discover a fresh direct deposit above and beyond your paycheck. It can be really tempting to start imagining fun things to do with that money.
But before you decide to spend that check on a jetski, consider the advantages of just using that money for something financially wise instead.
Putting yourself in a better financial position lowers your personal and professional stress levels. It can give you more financial flexibility going forward with each and every paycheck. It can help save you when things inevitably go wrong, turning what could have been a disaster into something entirely tolerable.
In other words, you can use the money for a fleeting moment of fun, or you can do something to make your life notably better for the foreseeable future.
Here are six great ways to use your tax refund check. Choose one of these, use that check and move on with life. You’ll find that your life is noticeably better in a lasting fashion.
1. Create an emergency fund.
It’s simple. Take the check to your bank and deposit all of it into a savings account. Then, just leave that money alone until something unfortunate happens that you can’t handle. Maybe your car needs some serious repairs. Perhaps you lost your job and need to keep food on the table and bills paid for a few weeks while you find another one. Maybe your best friend is getting married six states away and the trip is pretty expensive.
Whenever something like that eventually comes up — and it will come up — tap that money you set aside for it. It’s an emergency fund for just these kinds of situations.
How does this make my life better? Having an emergency fund means that unfortunate events become a lot less stressful, of course, but it also eliminates some background stress in life. You no longer wonder what you will ever do if your car doesn’t start or if you lose your job. You have a plan now, so those things don’t have to keep you up at night anymore.
2. Pay off a debt.
If you have a credit card bill or a student loan bill, simply use the tax refund check to pay it off in full. The debt’s gone. You’re free from it.
Going forward, you’ll no longer have to deal with that bill each month. It means that whatever the monthly amount of that bill is will stay in your checking account rather than disappearing into yet another bill. Thus, it becomes easier to keep all of your other bills paid, to avoid overdrafting and late fees going forward and to start considering other moves like signing up for the 401(k) at work (you can just contribute the money you were spending each month on that bill you just paid off).
How does this make my life better? Eliminating a monthly bill means less stress about keeping the bills paid. You suddenly aren’t walking quite as tight of a tightrope each month, and that feels pretty good. With that added flexibility, you’re probably reducing your overdraft fees and late fees on other bills, too, and that’s even better.
3. Put money aside for retirement in a Roth IRA (or a traditional IRA if you’re a high-income earner).
You can simply take that check and deposit it in your own Roth IRA (or, if you earn a high income, your traditional IRA) account. Once you’ve done that, it will sit there and earn a solid return each and every year, with the balance compounding and growing, until you reach retirement age, at which point (if it’s in a Roth IRA) you can withdraw it and the investment gains without any taxes. It’s all yours.
Making that choice now is going to be incredibly helpful for you when you’re older. Sure, you might forego something fun in the moment, but you’ll have some of what you need to keep the lights on and food on the table without having to work when you’re in your 70s.
How does this make my life better? Obviously, every dime you save for retirement, particularly when you’re younger and have many years for compounding to work in your favor, will have a tremendous positive impact on your quality of life in old age. However, simply having money in retirement savings is a stress reliever in daily life, and the more you have, the less worrisome retirement becomes.
4. Put it aside for your child’s college education in a 529 College Savings Plan.
If you’re a parent, putting that check aside for your child’s college expenses (or other educational expenses) is a powerful choice. Doing this will directly reduce your child’s student loans, regardless of the educational choices they may make after college.
In particular, putting that money into a 529 college savings plan is a great idea. In a 529, the money can easily be invested with the investment income being able to be used tax-free for educational expenses. It’s just money for your child, which will reduce (or even eliminate) their student loans.
How does this make my life better? Obviously, your child is the one that will benefit the most from this choice. In doing so, however, you’ll find yourself worrying just a little less about their future, and the prospect of them going to an expensive school seems a little less financially intimidating. If you’re planning on helping your child with educational expenses, then this will reduce your own burden in the future, which can be a great stress reliever.
5. Put it aside for a big upcoming expense you know is just around the corner.
Are you planning on replacing your car in the next year or two? Are you saving up for a home down payment? Are you planning on moving to another part of the country soon? What about a major home repair or addition?
If you know there’s a big expense of any kind coming up soon that you’re going to struggle to pay for, put your tax refund check aside to handle that expense or at least part of it. Putting enough money aside to cover a down payment on a car, for example, will reduce your car payments significantly and also reduce the total amount of interest you hand over to the finance company. Having a house down payment reduces your mortgage payments and can also get rid of mortgage insurance.
How does this make my life better? By simply taking care of a portion of those known bills now, you make those bills much easier to deal with in the future. You have less worry and stress about them going forward and much more financial flexibility when they do arrive.
6. Use it to pay for lasting energy efficiency improvements in your home.
Investing some money in improving the energy efficiency of your home will result in permanent reductions in your energy bill going forward.
If your return is small, consider things like switching to all LED lighting, putting a weatherstrip along the bottom of a couple of exterior doors, or putting caulk around the edges of a window where there’s a constant draft. Those simple moves will cut significantly into heating and cooling bills and, with the LEDs, will reduce the constant monthly energy cost for lighting.
If you have more money to spare, consider adding to the insulation inside the walls of your home to keep warm air inside in the winter and cool air inside in the summer, replacing light fixtures with ceiling fans to improve airflow and reduce the running of your much-more-costly furnace and AC, invest in a geothermal heating unit or solar panels or invest extra in an appliance replacement to get a more energy-efficient model.
How does this make my life better? Going forward, every single energy bill that comes into your home will be smaller than it otherwise would have been. While that change won’t be enormous, seeing an energy bill that’s 10% or 20% smaller means $20 or $40 or $60 that you wouldn’t have otherwise had every single month for as long as you live there. That kind of money can mean an end to a cycle of overdrafts, a faster pace of paying down debts, or just a little bit more breathing room in a tight budget.
Investing in your financial future helps you sleep better at night.
The real advantage of doing something wise with your tax refund is that it makes your financial future better, no matter what happens. You will always be in better shape than you would have been had you spent the money wastefully, and that will always mean less money stress and fewer worries keeping you up at night.