It is tax time and if you are like me, you are being bombarded with enticing ads encouraging you to spend your tax refund check on everything from electronics, vacations, cars, and other large ticket items. But do yourself a favor and IGNORE! Turn off your TV and step away from the computer!
You are probably thinking – But I deserve it. And guess what, you actually deserve SO MUCH MORE. You deserve to have a net worth that will increase exponentially over time. And the way to do that is to use your refund on items that will increase in value and have a lasting impact on your life.
Use Your Tax Refund to Pay off Debt
When I was in the midst of my Total Money Makeover Baby Step #2, debt snowball, and the end seemed nowhere in sight, I used my tax refunds as my extra boost to knock several months off my estimated payoff date. On an average month, I would manage to scrape together $700-$1000 to pay down on my loans while my minimum payment was about $525. But when I received my tax refund, I would allocate 75-90% to my student loans. So if I received $2500, $2000 would go to my loans and $500 to me. I allowed myself to spend this money on whatever I desired, guilt-free. This was an excellent boost to my morale!
Every month when I would pay my student loans, I would check my estimated payoff date and even though it was shortening, it seemed like the end date was barely changing. For instance, my end date would go from December 2019 to November 2019 with a double payment, which was still years away. I often wanted to quit and just pay the minimum like everyone else. But when I would send a $2000 payment, it would go from December 2019 to September 2019! I could really see my payoff, and all of a sudden I could boast that I was four months closer to paying off my loans. Eventually, I got to do my debt-free scream, which you can watch here.
Investing Your Tax Return in order to Build Wealth
Now that I’m debt-free, I found it impossible to blow my entire refund check on just about anything. I still like to split it up by putting some in my savings account and sprucing up my wardrobe, but I take the bulk of it and fund my Roth IRA.
Every year, individuals under the age of 50 can contribute up to $5500 to their Roth IRA ($6500 if you’re 50 or older). I set up my Roth IRA on my own so I am responsible for submitting contributions. The sensible way to do it is to schedule your payments in equal parts, which allows for dollar-cost averaging (Buying a stock at a fixed dollar amount instead of price, allowing you to buy more when prices are low and less when prices are high). Personally, I find it would be too easy to just stop the payments when I feel like my cash flow was dipping low. So instead, I take a portion of my tax refunds and purchase a large chunk of my shares for the year. Then I make two or three purchases throughout the year to get to my $5500.
Viola! Now I’ve managed to take a tax refund of $2000 and instead of spending it on clothes that will end up in goodwill, I’ve turned it into $7739 – assuming 7% interest over 20 years.
There are other more sensible things you can do with your tax refund, like using it towards your education or paying off your credit card debt. I am not here to say you can not spend it on fun things like a vacation. However, if you don’t have your financial ducks in a row, make sure you are using it as an investment into your financial future and not creating a depreciating asset at best or liability at worst.