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4 Smart Ways to Reinvest Your Tax Refund

by on February 6, 2012

4 Ways to Grow Up and Stop Blowing Your Tax Refund

You’ve spent all year footing the bill for Uncle Sam, so when you get your tax refund this April, it’s time to celebrate with some financial indulgence, right? Maybe not. Before you haul off and buy a Jet Ski or some other midlife-crisis toy, stop for a second. Have you considered putting that money to work with something more useful?

Tucking your refund away in a savings or investment account very year can get you started in the right direction. If you want to give your tax return a better life than the brief one it might have in your wallet, consider some of these beautiful, responsible options:

1)    Contribute to a Roth IRA.  According to Kiplinger, if a 25-year-old invests $5,000 a year in a Roth IRA with an 8% return, they’ll have $1.4 million saved by the time they retire. Your annual tax refund can contribute a significant portion of that $5,000. If that doesn’t sell you on an IRA, then consider that new housing regulations also allow you to withdraw money from your IRA to make a down payment on a home. And did we mention that when you make an IRA contribution with money from your tax refund, it also counts as a deduction on next year’s taxes? That’s a lot of spending power for just a little bit of effort on your part.

2)    Pay down your credit card debt. If you’re anything like most Americans, then you have credit card debt. The best way to get rid of that debt is to pay it off fast.  Do you know where you can get the money you need to pay off your credit card debt fast? If you answered “my tax refund,” give yourself a gold star for the day. Your tax refund probably won’t be enough to totally pay off your debts entirely, but it will put you a few thousand dollars closer to the black than you are right now.

3)    Weave a security blanket. If you don’t have an emergency fund already, your tax refund provides a good way to start building one. All families, especially those with children, should have some money saved up for crisis situations. We’re not talking about “I need to take my kids to Disney World” kind of crises, either. We’re talking about money specifically reserved for emergencies. What if you lose your house in a natural disaster? What if you lose your job or suddenly need cancer treatment? The ideal size of this emergency fund can vary depending on your income, but we recommend keeping at least $5,000 on hand at any given time.

4)    Take a class. Compared to the other items on this list, spending your tax refund on a class or lessons might seem a little indulgent. But no matter how you slice it, bettering yourself is a worthwhile investment. It’s about more than just learning something new. Classes that are focused on a hobby or on your profession can be both therapeutic and good for your career. We all need to take some time for ourselves every week, and learning to how to gather real estate leads or how to play the guitar is an excellent way to spend it.

If you’ve already got something in mind for this year’s tax refund, slow down and think it through, because often, there’s a better use for that money. Don’t waste the financial opportunities presented by your annual tax refund. Instead, invest that money wisely. If you do, you’ll build a better future for you and your family.

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