Top 3 Ways to Put Your Tax Refund to Good Use
Here are smart & safe investment ideas to use with your tax refund
After receiving tax refunds, people fall in either two categories: spenders or winners. Spenders are those who think of nothing but taking a vacation in the Caribbean, or buy a new tub for the home, or maybe use the money as a down payment for a new car.
There’s nothing wrong with being a spender, but you might be missing the point. Your tax refund was yours all along. It’s NOT a free cash windfall from the government and should be treated with the same mindset as your normal income.
On the other hand, we have what I like to call the winners. These are people who use their tax refund wisely. In some cases, winners end up with more money than they started. It can either be a job promotion after pursuing advanced courses or professional certifications or investing in new equipment and software for your business.
When it comes to your tax refunds, be a winner.
Here are the top 3 ways on how to put your tax refund to good use and become a winner.
1. Invest in a retirement account
Investing in a retirement account or IRA is one of the wisest and easiest ways to use your tax refunds. It doesn’t matter if you’re already contributing to an employer-sponsored 401(k) since you can easily open a traditional or Roth IRA in addition.
Of course if you are contributing to a 401(k), make sure you’re using an optimization service such as blooom to get the most out of your contributions. They also offer a free no-obligations analysis of your existing 401(k) account.
Roth IRAs give you the ability to take tax-free distributions after retirement. Meanwhile, Traditional IRAs allow you to contribute pre-tax dollars so you can deduct them later on.
However, this move is not ideal if you don’t have an emergency fund or have high-interest debt. If you belong in this category, it’s better to use your tax refund to pay off existing debt or create an emergency fund in a high-interest savings account.
2. Invest with a Robo Advisor
Nowadays, you can start investing money online with minimal effort, and you don’t need a lot of money to do so. Most robo advisors have very low minimum deposits and low annual fees, which makes them easily accessible to normal folks like you and me. And since their fees are a fraction of that of a human financial advisor with access to similar features, it makes them even more accessible and attractive.
Robo advisors are like humans; each one has a different set of features or personalities. Some of them focus on optimizing your existing investment or retirement accounts, some of them focus on specific investment strategies or verticals (such as hedging, socially-responsible investing or real estate for example), while many are a great place to put an additional investment (such as a tax refund!) This is how a traditional robo advisor works.
While many robo advisors do have a minimum deposit, they’re usually very low, which make them a wise place to put your average tax refund each year. The low fees and automated features make them the perfect place to “set it and forget it”.
Read more about how to invest your tax refund into a robo advisor here.
3. Invest in Self-Improvement
This comes in many forms. If you’re a freelancer, buying a new laptop or computer is a good investment strategy. If you’re a professional, using tax refunds for continuing education is a surefire way to get better job security.
Want to switch careers into something more lucrative and future-proof? There are hundreds of free or cheap online courses for learning computer programming or thousands of other subjects.
How about opening a small business? Maybe your tax refund is the key for that kick-start of capital or MBA.
Anything that has the potential to improve your quality of life is better than blowing all your money on a cool new LED TV.
It’s easier to spend the money outright than think of ways on how to put your tax refund to good use, I’ll give you that. But the biggest difference between a spender and winner is the latter always ends up with more of everything – be it money, job security, or sanity.
In some ways, you can be both a spender and winner. You can splurge every once in a while, but don’t forget to think of you and your family’s future while you’re at it.
About the Author
Will Bronstein is a software engineer, investor, and entrepreneur from Boston currently living in New York. After getting interested in the technology behind robo advisors and automated investment tools, Will and his friend Jim started BestRoboAdvisors.org to help potential investors navigate the new world of automated investing.