Did you ever get a tax refund and just waste the money? I know I have before, thanks, college! Hopefully, you will get a tax refund this year as the last few haven’t been as kind to me. This is the first year I will be getting a refund in the past four years so I am STOKED. Due to some short-term stock options sales in the past, I’ve had to cut the government a check each April. It sucks! But home owning, charitable contributions and investing more in my 401K have given me a refund for 2017! If you’re able to get a tax refund this year you have a few options: splurge, save or a combination of the two. I’m more of the latter option as I think we all need to fulfill a few wants as well as our needs with this extra money.
For example, I will get around $2,000 this year and intend to do the following:
- $900 towards Roth IRA (savings)
- $550 towards new golf clubs (splurge)
- $400 towards Ally savings (savings)
- $150 towards dog charity (good karma — future tax write off)
Of course, I could use all $2,000 towards one specific goal but I don’t think it is nearly as rewarding and more importantly motivating as spreading it among them. When people think about paying off debt, saving or investing for the future it typically comes with a groan or complaint about being “boring.”
The opposite occurs with splurging and buying a new TV or item you probably don’t absolutely need. It’s easy to feel guilty and think you should have spent the money more wisely once the newness wears off. This is why I recommending doing some sort of want & need combination with your refund or any type of commission or bonus you get. Everyone will have different “splurges” so I will let you decide how you’d like to spend that portion of your refund.
Here are five great ways to spend the other portion more wisely and actually help the angel on your shoulder.
Start A Savings Goal
In my experiences “saving to save” has a lower chance of being successful that actually having a goal in mind. Savings goals need to be tangible and attainable. Some examples could include:
- $5,000 for a short term emergency fund
- $8,000 for European vacation
- $15,000 for a down payment on a house
Instead of putting your savings in an account that yields .01% interest go with Ally’s or Barclays 1% yield. Still not much but better than nothing!
Pay Down Credit Cards
Carrying a credit card balance is never a good idea as you are getting crushed in interest. Most interest rates range between 10 – 20% APR depending on your credit. Instead of keeping the balance use a portion of your tax refund to become debt free or pay a large chunk of your balance to avoid future interest charges.
Remember credit card debt is the WORST type of debt as it had no positive impact like your student loans provided an education or mortgage provides your home.
Open or Contribute to a Roth IRA
If you’re new to reading you know I am a huge proponent of contributing to a Roth IRA. It’s another way to fund your retirement and has tons of tax advantages (read more here). Even if you haven’t opened one yet I highly recommend spending 15 minutes and getting started. Opening one is very easy with Vanguard can start contributing immediately.
For those of you that do have a Roth IRA already congrats! As a refresher, the annual contribution limit is $5,500/month so a portion of your tax refund can be a great way to jumpstart your contributions for 2017. Even if you can’t max out your Roth IRA don’t feel like it’s a waste and avoid getting started. Even adding a few hundred dollars or $1,000 is better than nothing.
- 29 year old opens a Roth IRA at Vanguard
- Initial Contribution: $2,000 from tax refund of $5,000 total
- Never invests again for 30 years (not recommended but for example sake)
- Invests in a low-cost index fund that grows 8% annually (roughly the average of the overall stock market over the past 100 years)
- At 59 the $2,000 contribution has grown to $20,400 (919% increase)
- This example assumes you never contribute another dollar which is unlikely.
Start a Side Hustle
Some side hustles do not require much start up costs like a blog or website. Learn how to start a blog in under 15 minutes here. I personally use Bluehost and costs as low as $3.95/month to get started.
Another side hustle I am currently working on is publishing my first book. Ten years ago publishing a book was hard, if not impossible for independent authors. Luckily Amazon is amazing and makes it very easy for anyone to publish a hard copy book with Createspace or self-publishing on Kindle with Amazon KDP.
Once you publish your work you will be able to collect royalties as long as it is active and being sold. My initial costs will be around $500. (Update: Here is my book, Advice For My Younger Self.)
Starting a side hustle may require some time and money upfront but can pay dividends in the long run. Some bloggers I follow make $50,000 to $100,000 A MONTH. I’d say it’s worth a try, the worst that happens is you lose a few hundred dollars. The best that happens is you make enough money to leave your job and work for yourself, with no boss, no schedule and enjoy financial freedom.
Pay Down Student Loan Debt
Although student loan isn’t as bad as credit card debt as the interest is lower it is still debt. It’s hard to start acquiring wealth when you have debt hanging over your head. Use a portion of your refund to pay extra towards your student loan debt.
What will you choose to do? I think it’s easier to do one of the five recommendations above if you break your tax refund into chunks instead of just spending or just saving the entire amount. I’m sure you will make the right choice. If you have any questions feel free to let me know in the comments or reply directly to my email: email@example.com.
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