As tax season quickly comes to an end (deadline is April 18th), many millennials are finding themselves with a welcomed financial windfall. That good ol’ tax refund hits your bank account and a big smile hits your face.
Keep in mind though, that because you received a tax refund, you essentially overpaid and gave the U.S. government an interest-free loan. Wouldn’t you rather take home that money in your paychecks throughout the year and do with it what you wish, such as invest it and earn interest?
On the other hand, you could have found yourself in a situation where you unexpectedly owed money to the IRS.
Ideally, you withhold precisely enough taxes year round to result in a refund/liability of $0.00 come filing time.
Below is a list of some smart ways to use your tax refund.
1. Pay off your highest interest bearing debt.
Do you have credit card debt that you keep promising yourself you’ll pay off? Well if you’ve just received a refund, do yourself a favor and put that chunk of cash directly towards paying off your debt. If you have more than one source of debt, find out the interest rate for each source and put the chunk of money towards the debt with the highest interest rate rather than spreading it out. Debt free is #goals!
2. Adjust your W-4.
Remember that form you filled out for Human Resources when starting your job? Well that’s kind of an important one. Luckily you can adjust your W-4 at any time throughout the year. If you’re getting a big refund, while it seems great at the time, you could have had all of that money in your pocket already. So if you’re significantly overpaying, you should consider claiming more allowances on your W-4. On the contrary, if you find yourself owing money year after year, adjust your W-4 to claim 0 allowances or set a specific dollar amount on the form to make sure you are covered. It’s up to you to decide how you prefer to manage your money.
3. Invest in a Roth IRA.
If you’ve read just about anything on Sparkable Finance, you’ve hopefully taken the not-so-subtle hint to OPEN A ROTH IRA. As a qualifiying millennial, you can contribute up to $5,500 per year to a Roth IRA. You do not have to contribute that much, so do not be intimidated if you think you can’t do that. You can contribute $100 here and there if that’s easier for you. Just get moving and do something. Millennial favorites Wealthfront and Betterment have seriously low entry points to accommodate any investor. They also take care of everything for you by choosing a portfolio best suited for your needs and age. Their interfaces are seamless and easy to use. Strongly consider putting even the smallest of tax refunds towards your future and have your money work for you!
4. Add to or start your emergency fund.
The advice among experts varies, but ideally you should keep at least 3 months’ worth of living expenses in a savings account. Often when life hits you, it tends to hit you all at once. Your car needs a repair at the exact same time you’re moving apartments while also shelling out for bridesmaid dresses and bachelorette parties. Ahhh! If you’re not prepared you could end up racking up credit card debt with no available cash to pay it off. If you have a safety net and don’t abuse it, then you can keep yourself in good financial health. If an emergency does come up that you need the cash for, work quickly to replenish the withdrawals and then go back to focusing on other goals. Savings accounts are by no means an investment vehicle considering that over time you actually lose money due to inflation. They are however an ok place for your emergency fund. Consider keeping your emergency fund separate from your everyday checking account and in a high-yield savings account like Ally Bank offers.
5. Go 90/10.
If your financial life is a work in progress, but your committed to actually making any progress, try this option. Take 10% of your refund as “fun money”. Use that portion to pay for that something you’ve been dying for and have really thought about. Or use it to take an old friend out to lunch, or spend a late night out with your best friends. Put the other 90% towards something more valuable in your life and better for you in the long run. (See options 1-4.)