Updated: Jun 10, 2020
Guess what time of year it is!? Nope, it's not your birthday but you will be getting a very nice gift! It’s Tax Refund season, and you’ve been waiting patiently for the government shutdown to end so that you can get your hard-earned money back. And let’s be clear, a tax refund is simply the government giving you back YOUR MONEY. But hey money is money and you should still be excited! And if you haven't filed taxes yet, check out this article for the best tax prep software. So before you get your hands on this large chunk of change, I wanted to give you some tips and tricks on how you should spend it. But before that, let me demonstrate just a few examples of how I completely blew my tax refunds in the past.
WHAT NOT TO DO
As I’m sure you all know, I wasn’t always this super responsible person when it came to money. Before I dedicated my life to personal finance, I had made some foolish mistakes with money. In college, I received my first big tax refund (thank God for the American Opportunity Credit) and I felt like the big man on campus with $3,000 plus in the bank. So what did I do? Absolutely nothing. I let the money sit in my checking account using a bit of it here, and a bit of it there. Then before you knew it…it was all gone. Yep gone! And I had nothing to show for it. I was so confused how that could happen, but I told myself it would never happen again. The following year when I got my refund I told myself, “I will not let this money disappear.” So instead of holding on to it, I went to the mall and spent it all in one day. FYI, spending your money at once to avoid it from disappearing over time is not a great solution. Now that “college me” has given you an example of what not to do, let me give you smart ideas on how to spend your tax refund.
START A BUSINESS
As most of you may know, I’m a huge advocate of entrepreneurship! The most common excuse for not starting a business is lack of capital. However, a tax refund gives you a great starting fund to launch your business. Whether it’s paying your LLC registration fees, buying business cards, or paying a website developer, your tax refund can help jump-start your business endeavors. So I beg of you, don’t miss this opportunity to go from employer to business owner and live the life that you’ve always wanted.
FUND PRIOR YEAR’S ROTH IRA
Most people don’t take advantage of funding their Roth IRA or don’t even know what it is. If this is you, It’s fine because I’m here to explain. A Roth IRA is a tax-free investment vehicle that allows you to invest money ($6,000 per year in 2019) and never pay taxes on the gains. For example, if you fund your Roth IRA and invest in something (stocks, real estate, businesses, etc.) and 5 years later its worth $50,000. That $50,000 would be tax-free money to you! Pretty cool right! Now here is a common misunderstanding, most people think that you have until Dec 31st to fund your Roth IRA. THAT IS FALSE! You have until April 15th (or tax deadline) of the following year to fund the prior year’s IRA. For example, I have until April 17th of 2019 to fund my 2018 Roth IRA. Thus, I can use my tax refund each year to fund my prior year IRA. BOOOMM!
PAY SANTA CLAUS BACK
Did you know that the average American accumulates over $1,500 in credit card debt from their Christmas shopping escapades? The worst part is that most of these individuals don’t have the money to pay the credit cards back. And in case you didn’t know Santa Claus loves his interest payments. So instead of fattening up Santa’s pockets use your tax refund to pay off those high credit card bills and start the year off on a great financial note. (To learn more about how to become debt free click here.)
INVEST IN YOURSELF
“The best investment you can make is in yourself” ~ Harry Hoover. In my opinion, everyone should live their lives by this statement. Do whatever it takes to better yourself and the money will come back tenfold. Take a college class, attend an online course, purchase books, attend conferences, these are all things that could take your life to the next level and your tax refund can give you a great financial start.
Now that you have these great tips and tricks go get your money and spend it wisely!