6 Smart Ways to Use Your Tax Refund That Will Help You Build Wealth
6 Ways to Use Your Tax Refund to Help You Build Wealth
Getting a tax refund? Don’t celebrate yet, getting a tax refund is not “prize” you did not “win” anything. In fact, you gave the government a loan to use your money until you file your taxes and get it back. If you do receive a tax refund this year, you really should adjust your tax witholdings so that you aren’t giving the government your money early. A better option for you and your family is to have all the money you have earned in your hands so you make the best decisions wih it. That being said, IF, you are getting a refund there are some things you can and should do with it to ensure you are being wise, intentional, and that you are making smart decisions that will benefit you for years to come.
I am going to walk you through a few different options. You can use these options as a way to filter through the best steps to take with the money. If you don’t need #1, move to #2 and so on. This list isn’t 100 percent inclusive of all the things you can/should do with a refund but it will get you to start thinking and being intentional with this lump sum of money. In fact, you can use this list with any lump sum of money you receive.
Make sure you have a “mini” savings. If you don’t have a minimum of $1000 in savings already, you need to take the first $1000 and set it aside as an emergency fund. This is a small emergency fund and intended to keep you from using debt to cover an unexpected surprise in your life.
If you already have a $1000 emergency fund set up, the next step is to put the rest towards your debt. If you have any consumer debt including student loans (not including a a mortgage) you should be paying off your debts with this money. It will be tempting to use this money for fun or stuff that you “want”, if you are in debt, now is not the time for “wants” it is time to take advantage of this opportunity to tackle your debts. In this same step, I am going to add Life Insurance. If you have anyone in your life that depends on your income to survive, you NEED Life Insurance. Depending on your age, you should be able to get a very affordable Term Life Insurance policy. If you don’t have a life insurance policy and you do have someone who relies on your income, use part of this money to pay for the premium of a Term Life Insurance Policy. I suggest you get a policy equal to 12x’s your income. With the left over money, pay off your debts.
If you have a small emergency fund, no more debts, and life insurance in place, next you should the money to build a larger emergency fund. Depending on where you are in your life and how stable your job is, you need anywhere from 3-6 months worth of expenses in a savings account. This is not an investment it is intended to be there for you when life happens and you need some money to help get you over a hurdle. I suggest you put this money in a HYSA (High Yield Savings Account) and don’t touch it, let it grow and make sure it is available to you when you need it.
If you have 3-6 months of expenses set aside in a savings account, you should consider investing the money for retirement. If you are eligible, I would suggest funding your ROTH IRA. If you have a spouse, you can fund a ROTH IRA for both you and your spouse. If you are not eligible to contribute to a ROTH, consider contributing any additional funds in your employer 401K.
If you don’t have a will/trust, use some of this money to set up your will. You need a will and possibly even a trust. These are items that will help you protect your wealth should something happen to you. There are quick and easy ways to set these up.
If you have all the previous steps covered, here are a few other items to consider, these are not in any particular order, but they are all important items that should be part of a healthy financial plan.
Consider paying for an identity theft protection program.
Set aside money to cover your health insurance, auto insurance, home insurance deductibles.
Invest your money in a brokerage account or put it in a savings account for any upcomming things you might want to spend money on, for example, vacations, money for a down payment on a house, save for a car replacement.
These are all good ways to use a lump sum of money any time you receive it. If you do get a tax refund, review your withholdings so that you end up as close to even as possible. No one likes paying taxes, but it is important that you pay what you owe, and not any extra. There is no one more qualified to manage your money than you, you do not need to use the government as a “savings” plan. If you are still confused about what to do with your tax refund, reach out and schedule an appointment to chat with us, we will be happy to walk you through the steps of making great decisions that will help you build your legacy of financial health,
