Aren’t tax refunds the best? It’s like a little tax refund fairy just dropped a wad of money on your pillow in the middle of the night, letting you finally buy those adorable kid boots you’ve always wanted or take that girl’s weekend to Tahoe your friends have been talking about forever.
You know that there is no tax refund fairy (or if there is, his name is Gary and he swills coffee in a cubicle at the IRS). We bet that you also know that just buying stuff isn’t the best use of your tax refund. Think of your tax refund as “free money” (though really, it’s just your money that the government was politely holding onto for you).
As long as your normal income covers your basic needs, then you don’t really need your tax refund money. That means that you have the ability to put your tax refund to work so that it can grow and grow and grow. Wouldn’t be great if you could double, triple, or quintuple your refund without much work? You can! Here are three ways to do it.
Pay Off Your Debt
The first way to grow your tax refund is to pay down your highest interest debt. Do you have a credit card with an 18% interest rate? (You shouldn’t if you’ve read this article on credit card balance transfers.) Let’s say that you have a balance of $1,000 on the card and only pay the minimum amount of $10 a month.
Even if you didn’t put any more charges on the card, it would take you over 19 years to pay off the card, and by the time you did, you would have paid $1,931 in interest alone! By paying off as much of that debt as possible with your tax refund, you can seriously cut down on future interest payments, which will give your refund money greater value.
You’ll also likely improve your credit score. Not bad!
Put It Away in Your Retirement Account
When it comes to retirement, the name of the game is time. The more you can put away and the earlier you can put it away, the more time your money has to grow. If you put $500 from your tax refund into your company’s 401(k) or your own IRA on your 30th birthday and assume a hypothetical 8% growth per year, that $500 will turn into $7,392 by the time you turn 65.
This certainly isn’t enough to retire on alone, but if you added $500 from your tax refund every year, you’d be looking at $100,443 in your account when you hit retirement age. That’s not bad, especially for just $500 a year!
Think about how much you could save if you put $100 into your retirement account each month AND added $500 from your tax refund! You’d supercharge your retirement savings, especially if your employer offered to match a portion.
Even if your finances are tight, remember that your tax refund is “free money.” You have no excuse for not saving for retirement. (Check out this article we wrote about how it’s never too early to start planning for your retirement.)
The stock market doesn’t go up every year, but in the long term – at least so far – it has risen. If you spend your tax refund on a pair of boots, that money will make you happy in the short term but, eventually, those boots will wear out or fashions will change and you’ll toss them or give them away. Then your money will be gone forever.
If you were to invest your money, it could grow over time, just as it would in your retirement account. Eventually, you could earn enough interest to buy yourself any boots you wanted while keeping your principal amount!
Investing doesn’t just have to be in stocks. Using that money to save for a down payment can help you invest in a home, which will allow you to begin building equity in an asset. (Learn whether you should buy or rent.) You can also invest in yourself by using the money to finish your degree or pursue a new certification that will let you find a higher paying job.
All of this isn’t to say that you can’t have fun with your tax refund. After all, you want to enjoy your life, not just make sure you have a huge pile of cash by the end of it. What we recommend is divvying up your tax refund. Give yourself 25% for something special that you want, and then put the rest to work for your future!