Did you know that you could use your tax refund to improve your financial freedom? It’s true – in fact, it’s a hot topic among American homeowners. Everyone wants to know how to best use their tax refunds to secure financial security.
First, it’s important to know what a tax refund exactly is, as well as why you get it every year. Getting a tax refund simply means you paid a little too much for the previous year’s taxes. You basically gave the government a zero-interest loan, and now they’re paying you back. How thoughtful.
So what are the best ways to use your tax refunds? Here are our Top 3 ideas:
Tip #3: Invest It
Securing a comfortable retirement is always a part of anyone’s plan for financial freedom. And in case you’re already strapped for cash throughout the year, your tax refunds just might be enough to secure your retirement for you over the next few decades.
The idea is to invest your tax refunds faithfully, every single year for 20-30 years or more, in an investment vehicle (or collection of vehicles) that give you at least 8% interest per year. If, say, you received an average of $3,000 in tax refunds each year, and put it in an investment fund that gave you 8% per year, you’d have well over a half million dollars at the end of 36 years.
And if you could wait another 9 years, that will double to a million dollars. That’s why this approach is best started as early as you can – the longer you can wait, the more comfortable your retirement will be.
Tip #2: Keep It In an Emergency Fund
Some statistics say that only 2 out of every 5 American households have enough savings tucked away for emergencies. You can use your tax refunds to join that statistic, so you can sleep tight at night knowing you have a financial safety net in place.
How much is “enough savings,” anyway? Good question. A good practice is to set aside around 3 months’ worth of household expenses. That’s a substantial amount that will cover most unexpected emergencies, and it will also cover you in the event you find yourself out of work for three months.
Tip #1: Pay Off Your Debts
On the road to financial freedom, debt is your biggest roadblock. In fact, debt pushes you further and further away from financial security – and the longer you stay in debt, the deeper in trouble you get.
So if you’re in debt, it’s a good idea to use your tax refund money to pay towards those debts. The goal is to erase ALL your debt, or at least reduce it to a very manageable level.
Our advice: Pay off the debts with the highest interest first, then pay off the debts with lower interest rates. If you have the option, go for debt consolidation to lower the rates even further, simplifying your payments.
These are our Top 3 ways you can use your tax refund to achieve financial freedom. Start paying off your debts, filling an emergency fund, and building a comfortable retirement… starting with your very next tax refund.