8 of the Best Ways to Spend Your Tax Return

Posted on Posted in Budgeting, Cash Management, Investing, Personal Finance, Retirement

So we just passed tax day.

Have you got your tax return yet? Sweet!

What are you going to do with it?

Hopefully you’ll spend your return in a way that adds real value to your life or expedites your financial freedom.

Here are eight of the best ways to spend your tax return.

#1. Build Your Emergency Fund

It’s always frustrating when we’re hit with a large, unexpected expense or a job loss. They’re never fun or easy to deal with, but we can make the hassle a lot less painful if we have an emergency fund.

Generally, you’ll want three to six months worth of expenses stashed into your emergency fund. I recommend holding the money in a savings or money market account of an online bank that is completely segregated from your normal spending money. I use and recommend Capital One 360.

#2. Eliminate Your Debt

One reason so many folks struggle financially is because their monthly debt payments are so high. High consumer debt financially ensnares people and prevents their financial freedom.

Take a look at this table and you’ll see why:

 

How Much Debt The Average American Has

 

 

By the time the average person pays their credit card, mortgage, auto loans, student loans, and other debt payments, they barely have anything left over. It’s a vicious cycle.

If you want to escape the never ending financial rat race, then throw your extra money, especially your tax return, into paying off your debt. Doing so gives you a guaranteed rate of return and it enables your financial freedom.

Generally, I recommend paying off your lowest debt balances first. Doing so has proven to provide motivation and momentum in getting rid of debt all together. Paying off your debt should be a top financial priority.

#3. Invest For Your Future

Another one of the greatest ways to spend your tax return is to invest it for your future. With the help of compound interest, your tax return will be worth much more money down the road than it is today.

For example, let’s say you’re 30, get a $2,400 tax return every year, and invest it in an S&P 500 index fund using a Roth IRA. In 35 years, when you’re 65, your invested tax returns would be worth more than $400,000 ($413,560.33 if you average an 8% return).  Not too shabby.

$400,000 is worth a heck of a lot more than the $84,000 you contributed from your tax returns. The power of compound interest is awesome, isn’t it?

Now that’s money well spent, not wasted.

#4. Save For Your Kids’ College

If you’ve already crushed your debt (excluding your mortgage) and you’re saving a healthy chunk of your income for retirement (15% plus), then you may want to start stocking money away for your kids’ college.

One great way to do this is to fund a 529 College Savings Plan. Each state has its own plan with different investment options, fees, and incentives, but generally, 529 plans are a great investment vehicle for college savings.

The primary reason I like 529 plans is that all of your withdrawals that are used to pay for qualified education expenses (tuition, room and board, fees, school supplies, equipment, books, etc.) are tax free—you never get taxed on the investment growth.

In Utah, I get a state tax credit on a portion of the money I contribute today, and when I withdraw the money in 15 years from now, I won’t have to pay state or federal tax on my investment returns.

In other words, if I contribute $1,000 today and that money grows to $10,000 in 15 years, I won’t have to pay a penny of taxes on my $9,000 gain. If you “prepay” college early with a 529 plan, it could save you substantially down the road.

#5. Open A Health Savings Account (HSA)

If you qualify for an HSA (have a high deductible health insurance plan) then this may be another great place for you to stash your tax return. An HSA allows account owners to pay for current health care costs and save for those in the future. There are 4 primary advantages of HSAs:

  1. Contributions are tax deductible
  2. Interest earned is tax free
  3. Account Owners may make tax-free withdrawals for qualified medical expenses
  4. There is no year-to-year maximum account carryovers like flexible spending accounts

So here’s how it works. As an example, let’s say you contribute $2,000 to an HSA today. Your account grows to $3,000, and then you pull $500 out for medical expenses. Not once did you ever have to pay taxes on any of that money. You got to deduct the $2,000 you contributed. Your HSA grew and you owed no tax, not even on what you withdrew since it was used for qualified medical expenses. Sweet, huh?

HSAs can be great tax shelters and great investment vehicles if used appropriately. I highly recommend them for individuals that are nearing retirement or for those folks that are already maxing out other tax advantaged investment options.

#6. Give Generously To Charity

Here’s another great way to spend your tax return. If you want to find more meaning with your money, then donate generously to a cause that shares your values.

As crazy as it may sound, donating money and using it to help strengthen a cause you believe in is one of the best investments I know of. I recommend donating at least 10 percent. You’ll love your ROI.

#7. Down Payment Towards A Larger Goal

Maybe you’ve been saving to go on a nice vacation, buy a new car, or have some other big spending goal you’re shooting for. Well, if that’s the case then using your tax return as a down payment for your larger goal is a smart idea.

Here’s what I recommend. Open an account with an online bank like Capital One 360. Online banks pay higher interest and separate your funds from your typical spending cash. This helps ensure your savings goals actually get met and the money gets spent how you see fit rather than slowly bleeding out.

Next, create a sub-savings account that aligns with your goal. For example, create a vacation or new car account. Then deposit your tax refund into that account, and like magic, you have saved a big chunk of change for one of your big spending goals. Now set up automatic transfers into this account, and you’ll make your wish a reality.  

Check out Bank Like A Boss: 3 Simple, Unconventional Strategies to Get the Most Out of Your Banking for more details.

#8. Build Lasting Memories

The goal of making money smart decisions isn’t really about money. It’s about being able to live a rich life. It’s about freedom. It’s about designing and living our dreams. Money is simply a tool that helps us create the life we want.

With that said, use your money to build lasting memories. Take your family camping. Go on a vacation. Travel the world. Explore your local area. Do something with your tax return that’s different than what you normally do.

Spend your money on what matters most—building memories not acquiring possessions.

Conclusion

Most folks blow their tax return on something that doesn’t add real value to their life or they slowly spend it with time and have nothing to show for it. This is a waste of a good opportunity. Rather than waste the inflow of extra cash, use it wisely.

If we use it wisely, if we spend our tax return in the smartest ways possible, we’ll get ahead with money. We’ll win financially.

Winning with money requires intentionality. It requires a plan. But more importantly, it requires action. Be intentional with how you spend your tax return and you won’t regret it.  

Action Steps

Go and “spend” your tax return in the best ways possible.

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Please comment! Please let me know what you think—what you liked, what you didn’t, any questions you have, or future topics you would like to see discussed. I want this to be about YOUR financial freedom! I want to provide answers to what YOU need help with!

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