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It’s tax time in North America, and that means some people are going to get a tax refund. What should you do with that money you get back?
We all groan when it comes to tax time. It comes around every year. We know it’s going to happen, but that doesn’t stop us from hating every second of it. The only good thing that comes from it is some money back through a tax refund.
Now you’ll need to figure out how to use that money sensibly. You know you want to change the way you use your money. It’s time to get on top of your budget and make a plan for the future. So, instead of using that money on shopping sprees and just bills, you want to look at ways to use it more effectively.
Pay down your debts with your tax refund
If you have a lot of debts, the most sensible way to use your refund is by paying down your debts. Of course, nobody really wants to do the sensible thing, but you know it’s the best option for you. So, you need to look at the best way to use your refund to pay down the debts.
The faster you pay off your debt, the more money you’ll have available to spend how you want. You’ll need to decide if you’re using the snowball method or the avalanche method to pay down debt. This will determine the debt that you put your tax refund on.
Sure, you don’t have that money now for other things in your life, but you weren’t going to have that money, anyway. You were going to spend that money on your debt eventually, so why not get it out of the way and get closer to the end of your financial problems?
Put money into a savings account
Another option is to use your tax refund for your savings. If you’re working on building an emergency fund, put all the refund straight into there. You could be much closer to your goal much sooner so you can put less in each month after this. If you have the emergency fund, but the money into your vacation savings, your rainy day savings, or another pot.
The exact place will depend on your savings strategy. I love having separate accounts for separate needs. I have an account that is purely for buying furniture—and money doesn’t go into that account each month as it’s based on what I need to buy. I have an account for vacations, and one for immediate emergency needs, and one that covers months of income should I lose my job. This is the way my brain works.
So, look at how you save. When you get that money back from the IRS (or the CRA if you’re in Canada) then put it straight into a savings account for the future.
Put the money straight into an investment account
How big is your tax refund? If you’re getting $3k or more back and you’re not paying down debt, you’ll want to consider putting the money into an investment account. It is going to be so much better for you in the future than it is right now.
I don’t get tax refunds as I’m self-employed. This is when I have to pay the tax that I’ve saved each month. But when my ex used to get his tax refund, I would encourage him to put it straight into an investment account for his pension. He never did because he just likes to spend all his money, but he could have had $10k over the last couple of years just purely from the refund. That money would have been earning on the investments, so it would have been much more now.
You’ve already had that money out of your account. This isn’t extra money but just some money back that you didn’t initially miss. Why are you just going to spend it when you can invest it?
Okay, use a little of it to spend something on yourself, but invest as much of it as you can. And if you don’t want to invest it in your own accounts, invest it for your children’s future.
Invest your tax refund into a business or side hustle
Are you thinking about starting up a side hustle? You could use the money you get back to invest in that. You are putting money toward your future instead of just splurging on items that you don’t need. you’ll want a plan to put together to make sure this is an investment and not another failed hobby.
What about if you already have a business? There may have been a course you wanted to buy, or you may need a new computer to do your work. With that in mind, you need to look at what is necessary for your business to ensure the investment is made in the right way.
Alternatively, you could look at home repairs or other types of investment. This is going to depend on what you need in your life. If it’s a need, then use the money.
MORE: 3 tips for going from one income to two
You can spend the money you get if you want, but there is a better way of using it. Consider any of the three above instead of just splurging on a shopping spree.
Get in touch to talk about how to use your tax refund effectively in your life.