It’s that time of year…tax time. Some of you have probably already filed your taxes and received a refund, while others of you may be waiting until the last minute to file. If you have one coming, I thought it would be a great idea to think about a few of the best ways to use your tax refund once you receive it.
Obviously, it’s best not to get too big of a refund because that means you’ve been giving the government an interest-free loan of YOUR money. So, if you do have a huge refund, check on your withholding rate at work and see if you can change it so you keep more each paycheck.
Let’s take a look at some of the smartest ways to spend your tax refund:
1) Build Your Emergency Fund
Though not the most exciting of options, this is one step I highly recommend you do first. If you don’t have at least $1000 in an emergency fund, start with that. Life is filled with unexpected events and having an emergency fund can give you peace of mind.
Once you have that $1000 emergency fund and have paid off all consumer debt, then you’ll want to work your way up to saving 3-6 months of living expenses. If you’re in a volatile job or self-employed, you may even want to consider a 6-12 month cushion.
2) Pay Off Debt
If you have any debt besides your house (AKA credit card debt, car loan, student loan, etc.), chop away at it! You need to get that out of your life for good. I always think about Proverbs 22:7: “The rich rule over the poor, and the borrower is slave to the lender.” You don’t want to be a slave to Capital One or Chase…or anyone for that matter.
There are several ways to pick up steam paying off debt. One of my favorites is the Debt Snowball. The idea is simply to pay off your smallest balance first. Then, continue by paying off the next largest, the next largest, and so on until you’re done. You can find a helpful Debt Snowball calculator at Crown Financial.
3) Invest in a Roth IRA
Someday you’ll probably want to retire (or at least work less or do more volunteer work) and social security is not going to provide all that you need to survive. A Roth IRA is a fabulous way to save, and the benefits are many (you can see more about it over on DaveRamsey.com).
I highly recommend Vanguard as the best place to set up your Roth. They have low fees and are owned by the shareholders (instead of outside stockholders). You can read a book like The Simple Path to Wealth to figure out how to invest your money at Vanguard or you can choose a Target Date Retirement Fund (the fees are slightly higher, but you don’t have to worry about rebalancing anything). That’s the route I’ve chosen for my Roth.
4) Pay Down Your Mortgage
There are many different views on this, but as someone who has paid off their home, I’m a huge proponent it! I can’t even begin to tell you how much of a relief it is to not have that monthly bill…and to know that we own our home free and clear. We got really serious about paying off our home about eight years ago, and we finally finished it in August of 2017. Basically, we put ourselves on a written budget and threw any extra money towards the principal. It wasn’t easy or fast, but it was definitely worth it.
5) Begin a Car Replacement (or Other Big Ticket Item) Fund
Think ahead about 3-5 years and consider what might need replacing in the future. Will you need a new-to-you car? Maybe your roof needs to be replaced? Maybe there is an upcoming remodeling project? Consider opening up a new savings account and putting your tax refund into it and save for future projects.
6) Fund Your HSA
Do you have a high-deductible HSA qualified healthcare plan? If so, you could use your tax refund to partially fund your HSA. Individuals can put up to $3500 in it for 2019 while families can put up to $7000. Find out more of the advantages and disadvantages of HSAs at NerdWallet.
7) Purchase Life Insurance and Make a Will
Those of you who have been following my blog for a while know how passionate I am about life insurance. Unless you are able to self-insure, you need it. Life is unpredictable and can change in an instant. Providing the safety cushion of term life insurance could make a terrible situation less scary. Don’t get the whole life stuff…you only need term.
See more about why I’m passionate about life insurance here.
You also need to make sure you have a will in place. None of us like to think about dying. I get that. But, it’s our job to be responsible adults and make sure things are as easy as possible for those we leave behind. Walking through grief is hard enough. Adding a financial mess to that makes it so much worse.
Please, please, please be sure you have a will and term life insurance in place.
8) Make a Memory
This year, you might decide to use your tax refund to make a memory. I’m a huge fan of experiences over stuff, and I hope to use our tax return to begin to save for a special vacation. With my oldest daughter a freshmen in high school, time is limited…and I want to make as many memories with her as possible!
9) Give It Away
As Christians, we are stewards of God’s money. Sometimes, when I find my perspective getting out of whack, I give extra. It reminds me that it really isn’t mine in the first place, and my goal should always be to care for others with what we’ve been given. The Bible says that where your treasure is, there will your heart be also.
I like what Randy Alcorn says on his blog, “Do you wish you cared more about eternal things? Then reallocate some of your money, maybe most of your money, from temporal things to eternal things. Put your resources, your assets, your money and possessions, your time and talents and energies into the things of God. Watch what happens. As surely as the compass needle follows north, your heart will follow your treasure. Money leads; hearts follow.”
Whether you give to a church or a para-church organization or directly to someone in need, you will find yourself blessed. Giving loosens your grip on money and helps you gain perspective of what is really important–to love God and love your neighbor as yourself. Instead of storing up treasures on earth, you will be storing up treasures in heaven.
Hopefully this has given you some ideas about wise ways to spend your tax refund. I’d love to hear in the comments below how you plan to spend yours (if you’re getting one)!