I love tax season!
Yes, seriously. Don’t get me wrong, I don’t love doing my taxes. It’s a chore that I look forward to crossing off my list. But it’s so exciting to save money with various deductions and even more exciting to get a tax refund check deposited into my account!
HOW TO SPEND YOUR TAX REFUND LIKE A BOSS
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Why Do You Get A Tax Refund
Before I go any further, I want to clarify something: the goal should be to minimize your tax refund each year. The reality is, a “refund” is really just the money you let the government borrow, at no interest, for a year. So, you may want to review your W-4 withholdings first. If you need help with doing your taxes, there are great resources such as Liberty Tax or E-File. You can check out my step by step instructions for filing your taxes online!
How Much Is Your Tax Refund
According to the IRS, the average refund is $3,120! Now, when so many of us are struggling to stretch our dollars, an extra $3,120 can go a long way!
How much money do you have in savings? If the answer is $0, you may want to consider building an emergency fund. When we got back from vacation, we were greeted with a dead car battery on Monday morning. We’ve had a refrigerator and dishwasher break simultaneously at one of our rental properties. Thankfully, we don’t need to add to our debt because we have an emergency savings fund for situations such as these.
There are many savings challenges out there to help you build an emergency fund throughout the year. But what better time to build your fund quickly than with a tax refund?
Pay Down Debt
A great way to spend my tax refund is by paying down debt. You can save tens of thousands of dollars by putting lump sum payments towards debt. If you have multiple balances (loans, credit card, etc) you can either put the money towards your highest interest loans – known as the Avalanche Method, or towards your smaller balance loans – known as the Snowball Method.
My husband and I prefer the Avalanche Method since this ultimately saves us the most money overall.
Many of us have a 401k or IRA in order to help save for retirement. If your employer matches a % of contributions towards your 401k, you can use your tax refund money to not only contribute to your retirement, but get FREE money from your employer as well!
Even if you are already maximizing employer contributions (or you work for yourself), putting a lump sum into your retirement savings account will earn you compounding interest year over year. That means the more you contribute now, the more you’ll earn for your retirement!
Since my husband and I have an emergency savings and already make large payments towards debt and retirement, our favorite way to use our tax refund is to invest! How we choose to invest varies. We love to invest in real estate, so if our tax refund can help with a down payment on a property, then we might go that route.
If we’re not looking to purchase a home, we have a few other investments we contribute to, including our daughter’s college investment account. As long as our money is working hard for us, we are happy campers!
Make A Plan
Regardless of which method you choose for your refund, your best bet is to have a plan! As I mentioned, our plan for this year is to put our refund in the “investment” category.
What’s your plan?