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How to Invest Your Tax Refund


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Getting a tax refund is like celebrating Christmas too late. But instead of spending money to be happy, you get money.

While there are many ways you can spend your tax refund, there are also ways to invest in yourself and your future. Here are some ways you can create your tax refund.

. 1
Paying off old debts

If you are struggling with old debts like credit cards student loans or medical bills, now is the time to finally pay them off. If you're not sure which debt to pay off first, consider the one with the highest interest rates. High-interest debt such as credit cards can be exacerbated by high interest expenses, late fees and other penalties.

You can also use it to bring current but not outstanding debts up to date. Get your electricity bill for example or pay off the principal amount of your student loan. The earlier you pay off everything, the less burden you carry.

. 2 Start (or build up) your emergency fund

If you only scratched with your regular paycheck, you may not have the extra money for an emergency fund. Fortunately, your extra money can help. Use your tax refund to open an emergency fund. This can be a high-yield savings account that you keep separate from your regular checking account. It is not an account that should be immersed frequently – unless there is an emergency – but you should have easy access to it.

If you already have an emergency fund, this is a good time to give it a boost. An emergency fund should consist of three to six months' worth of spending that is different for everyone. If you don't think you would survive financially if you missed a paycheck, pass your tax refund on to your emergency fund.

. 3 Start investing

Investing is different for everyone. It can be as small as micro-contributions through an app like Acorns, use a robo advisor like Betterment, or manage your investments yourself through an online broker like Robinhood.

Investing your tax refund is a great way to increase your return. While a high-interest savings account has an annual interest rate of over 2%, the average return on the stock exchange is 10%. While you could lose money in the stock market, you could also expect serious profits.

Investments come in many different forms. Before you register with a company, determine whether you are more of a hands-off investor (best for robo advisors) or a hands-on investor (best for brokers). Also consider your risk tolerance and when you want to use your money. Equity market investments are best suited for long-term investments or for money that has not been touched for at least five years. So if you plan to use your investment money soon, you should consider other options, such as: B. a savings account.

. 4 Contribution to your retirement account

Preparing for your future after your career is one of the most important financial contributions you can make. If you have a 401 (k) plan sponsored by work and are not making maximum use of your contributions, use your tax refund. If you are older than 50, use the additional money as a catch-up fee.

You can also use it to start or fund your IRA. Regardless of whether you have a work-sponsored pension plan or not, contributing to your IRA provides an additional cushion for retirement. IRAs also have catch-up contributions, which is helpful if you are 50 or older and are not sure you have saved enough for retirement.

. 5 Start (or build on) your HSA

A health savings account is a savings plan specifically designed for health-related costs. HSAs are a kind of investment account, although they are called "savings plans". If you have a high deductible health insurance plan, you can open an HSA. HSAs are tax exempt in three ways: Your contributions, income and withdrawals are not taxed.

. 7 Saving for college

Whether you have postponed college attendance yourself or want a head start in your child's education, use your tax refund to save for college. You have different options, e.g. For example, a high interest savings account, an investment account, or a 529 plan.

A 529 plan was created specifically for college savings. But it behaves more like an investment account. Income grows tax-free and as long as you use the funds for education-related costs, you will not be able to pay taxes on your withdrawals.

. 8 Invest in Yourself

While college is a great self-investment, there are other ways that you can use your tax refund for a good cause. If college is not on your radar, you should take courses in an area or industry that you are interested in. If you've thought about changing careers, use your money to invest in those changes. If you need capital to start your own business, this could be your chance.

Also consider using it to give yourself a much needed break. Regardless of whether it's a vacation fund or just money for a massage or spa day, your tax refund can help you top up, reset, and realign. It's easy to turn to other materialistic things, like buying new clothes or shoes, but try to focus on what would improve your well-being in the long run, not a quick fix.

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