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It's tax season, the time of year that most Americans dread because doing taxes can be a stressful and difficult event. Trying to understand tax codes, deductions, and write-offs are not for the faint of heart. Luckily, there are tax professionals and preparation companies ready to help you, along with tax preparation software if you're feeling brave and want to try doing it on your own. However you get your taxes done, let's assume you're due a refund.
Tax refunds are a nice little shot in the arm for many consumers, and it usually comes at a good time of year for those still recovering from the holidays. Remember, though: your tax refund is just the government returning your own money to you that it's been holding, interest-free, for the last year. So, if you're getting a large refund, it might be wise to estimate your tax liability for the coming year and adjust your withholding so that you have use of that cash throughout the year. Ideally, you should funnel that extra money in your paycheck to a savings, retirement, or investment account that'll earn you interest.
Most people, however, don't have the discipline to save that extra cash, so having the government do it for them can be advantageous. Getting a lump sum back in the form of a refund gives you many options for what to do with the money. Whether you choose to save it or spend it, you should look for ways to maximize it. Here are a few ideas.
Pay off credit card debt
Carrying credit card debt can be a very expensive and stressful ordeal. And, if you're only making minimum payments each month, you're in for a very long ride to pay anything down to $0. That's assuming, of course, that you stop using your cards. If you continue to charge, you might be paying for them forever.
The interest rate you pay on credit cards, which is usually high, can add up to thousands of dollars each year, significantly cutting into your working cash flow. While investing your tax refund or putting it into a savings account might feel like a better idea, remember that there's no place you can invest that money that'll give you a bigger return on investment than paying off high-interest debt. Your rate of return on that money will be equal to the rate you're paying to your credit card company, as high as 30% in many cases. No bank will pay you that kind of interest on your money.
Even if you're unable to pay off your credit card balances entirely, you'll still save money, and you may be able to transfer the remaining balances to a card that'll give you a 0% introductory APR for a period. This could help you pay off your balances entirely. Just be sure to pay attention to any transfer fees you may face, as well as what the rate will revert to once the initial rate expires. You definitely want to eliminate the balance within the intro period, as many credit card companies charge interest retroactively if you reach the end of the period and still hold a balance, even if it's just $1.
Start or build up your emergency fund
Life sometimes deals you an unexpected financial blow, and being prepared for it is one of the best ways to protect your financial health. Having money in the bank to rely on in the event of an emergency will give you peace of mind and keep you from racking up a large amount of credit card debt to cover something unexpected. Sometimes, emergencies come in the form of a large car repair or a broken furnace; however, be aware that they can also come as something more serious, such as an unexpected illness or loss of a job.
Financial advisors recommend having cash reserves on hand to cover at least three months of expenses to get through one of life's serious emergencies. Investing your tax refund into your emergency fund could give you a huge leg up.
Put it away for a future purchase
If you know you have a big expenditure coming, consider putting the money away to help fund it. This could be a down payment on a new car, braces for the kids, or even a vacation. Whatever it is, it'll be better to pay for it with these saved funds than it would be to tap into credit or use your emergency fund.
It's best to put it away in a separate account so you're not tempted to spend it on other things. Consider a high-yield checking or savings account as a place to put it to work until you need it.
Invest in yourself
If your tax refund can be used to better yourself and your earning power, then consider utilizing it that way. Maybe you'd like to work toward an advanced degree that'll allow you to get a higher paying job or advance in your current one. If this is the case, then spending the money on tuition could be a great use of the money. Perhaps you want to learn a new skill that could yield a higher paycheck or help you change to a better career. Whatever your goals are, investing in yourself is never a bad idea.
If you've always wanted to start your own business, utilizing your tax refund money for that purpose could be a great idea. Whether you intend to give up your regular job eventually or you just want a side business for extra income, your tax refund money could get you started on the right path.
Investing your tax refund money into yourself could bring big dividends down the road in terms of earning power and financial security, so don't overlook this way of putting your tax refund money to work.
Improve your home
Your home is most likely your biggest asset and, if you were fortunate enough to buy it at the right time, your biggest potential wealth builder. Buying the right house at the right time and holding it until retirement could mean having a large chunk of change late in life when you'll need it.
Consider investing your tax refund into a home improvement that'll give you a good return on investment when it's time to sell. However, if there are any critical maintenance items outstanding, complete those first. Maintaining your biggest and most expensive asset is of utmost importance. That just means that if you're deciding between some fancy lighting for the yard and getting that leaky roof fixed, go with the latter.
For better energy efficiency, consider replacing windows and doors with newer, more efficient products. If your HVAC system is an old energy hog, replacing it with a new one could save you money now and increase the home's value later. To improve your curb appeal, consider upgrading your home's fascia with modern products for a fresh, updated look. Whether you intend to sell now or down the road, making smart investments into your home will give you a good return on your money later.
Invest for the future
There's perhaps no better use for your tax refund dollars than not using them at all. Investing your money for the future could go a long way toward saving what you need for retirement. If you consider that the average tax refund is around $3,000, that's a hefty piece of change to get started with. And, if you make the decision to invest your tax return refunds for years to come, you could end up with a sizeable sum at retirement time.
If you invested $3,000 today and continued to invest that same amount over 20 years, you'd end up with well over $100,000 dollars even at modest interest rates. If you invest well and capitalize on the markets, you could have much more. If you're unfamiliar with how interest compounds over time, there are compound interest calculators that you can play with to understand how it works. At investor.gov, you'll find a wealth of information on the best way to invest your money.
Take a great vacation
If you have all your financial bases covered, then consider treating yourself and your family to a great vacation. Statistics show that American workers, on average, take about half of the vacation time given to them. As a result, American workers are stressed out and less productive than others around the world are. In fact, there's scientific evidence that taking a great vacation can improve your health, your outlook, and your productivity.
A recent study by the American Psychological Association showed that a vacation could significantly reduce stress levels in workers for the simple reason that it separates them from events, places, people, and activities that promote stress and anxiety.
And, the results aren't just temporary; they can last for several weeks after returning home and getting back to work. And, in the weeks after, those who vacation suffer fewer stress-related ailments such as physical aches and pains, headaches, sleep problems, and heart issues.
Speaking of heart issues, many studies have shown that vacations promote good cardiovascular health. One such study on men who had existing heart issues and didn't take regular vacations for 5 years in a row showed they were at a 30% higher risk of having a heart attack than men who vacationed at least one week a year. The results were similar when researchers looked at the statistics for women. Women who went long stretches without taking a vacation (six years or more) were nearly eight times as likely to develop heart disease or die of a coronary event such as a heart attack, compared to vacationing counterparts who took two vacations a year.
Productivity and performance also improve among those who take regular vacations. Improved performance at work leads to quicker advancement and higher earnings. It also leads to increased happiness and lower stress levels. Vacations help break the cycle of stress at work and prevent burnout, which is a killer of motivation and feelings of well being.
Sleep issues have become epidemic in America. Work and home stresses and anxiety about current or future events can create sleep disruptions that lead to an inability to focus, decreased alertness, memory issues, and poor performance. Also, sleep deprivation can lead to daytime sleepiness that can be difficult to manage and even dangerous when driving or operating machinery. Vacations help interrupt bad sleep patterns and the habits that contribute to them, such as blue light exposure well into the evening, worrying about work, or working long hours.
Donate to a good cause
If you've accomplished a few things on this list and still have money left over from a tax refund, consider donating to a reputable charity. Not only will it make you feel good but it will also be a true contribution to making the world a better place. In addition, you could see a nice deduction on next year's tax return. Sometimes, combining donations of money with donations of your time can have a big impact. Involving your friends and family in the process can broaden that impact and help you make a real difference in your community. Few things soothe the soul like truly helping others in need.
As you can see, there are many good uses for your 2017 tax refund. The important thing is to identify the area where it'll do the most good, and remain dedicated and diligent about not blowing it on things that won't matter in the end. Your tax refund can help you be healthier and more financially secure. Choose wisely for a more prosperous 2018.