According to reports, 8 out of 10 Americans were able to receive $2,895 as their average tax refund. This is a huge amount of money that has a lot of potentials if you use it wisely. The question is, what will you do with it?
Most people would go crazy over this money and immediately plan a vacation. Or they will go on a shopping spree to reward themselves. While there is nothing wrong with these, you need to analyze your finances first before you make a decision. You need to make sure that you are not overlooking a more important expense that you need to pay for.
With the rising cost of living and the multiple financial responsibilities that we have, we need to make sure that every dollar we spend will count. The money that you got from the tax refund has all the potential to increase personal net worth. You just have to make sure you make the right choices that will lead you there.
Ways to use your tax refund to improve your net worth
There are many ways for you to use the refund money that you got. If you were one of the lucky ones to get more than $3,000, then you have a huge amount to work with. So what can you do with the money?
Here are a couple of suggestions.
Pay off your debts
Debt is a negative mark on your net worth. If you want to improve your personal finances, you need to get rid of this. If you do not want to use all of your tax refund money, at least pay off the high-interest debts – like your credit cards. This will help you save money on the debt in the long run. The faster you pay off credit card debts, the less you pay on the interest of the balance. In fact, if the tax refund can pay the debt completely – go for it! This will free up money on your budget and you can use this extra cash on something else.
Increase the equity of your home
Apart from credit cards, you should also consider using your tax refund to pay a chunk off your mortgage. Every payment you make towards your home loan can increase personal net worth through the equity of your house. Not only that, paying the lump sum will help you pay less on the interest of the debt.
Add it to your retirement fund
If your debts are all okay and you do not think you need to pay them off immediately, then you should just focus on the future. Look at your retirement fund and see if you can make a lump sum contribution. With the way the cost of living continues to rise, a 1 million retirement fund is no longer enough. If you want to live comfortably when you retire, you have to make sure that you save as much as you can towards your retirement. You also have to make sure you do it early. This is how you can maximize the compound interest that will make. this fund grow.
Give your emergency fund a boost
Another way to increase personal net worth is through your emergency fund. Of course, this is more for your security than anything. While this savings is done with the intention of spending it for an unexpected event, it will still help protect your finances. An emergency fund is one way for you to ensure that you will have the finances that can help you survive. It is also a way for you to avoid going into debt. All of these will indirectly contribute to the growth of your net worth.
Invest in the stock market
This is considered to be a really direct way to grow your finances. According to experts, you should not invest everything in stocks all at once. It is better to adopt a strategy called “dollar cost averaging”. This is when you let your money trickle towards your investments – investing more when the market is low and less when it is high. You can decide how long you will divide your investment – it could be over a few months or over the course of one year. It is all up to you.
Create a passive source of income
Finally, you can also use your tax refund to create a passive source of income. There are so many options to choose from. You can start to renovate a part of your home (e.g. the basement or unused garage) and convert it into a small apartment. Rent it out for extra cash. Or you can set up an online business – which does not really need a lot of money to finance. This extra income will really help you meet your financial goals faster.
Use your tax refund to improve yourself
While it is usually a good idea to use your tax refund to improve your financial position, it is also a great idea to use it to improve yourself. And we do not mean using it to pay for a spa or salon. It has to be something that can help you become more productive.
Here are some of the ways that you can invest in yourself.
Learn something new
Use your tax refund to improve your knowledge and skills. This is probably one of the smart ways to use your tax refund. When you invest in your own abilities, it is an investment that nobody can ever take away from you. If you invest in a house or car, this can be taken from you. But whatever you learn, it will remain with you forever. You can use this improvement to bargain for a higher compensation or qualify for a better position.
Pay for healthcare
Another way for you to invest in yourself is to pay for a healthcare need. The truth is, a lot of Americans do this. It is revealed that a lot of the early recipients of the tax refund spent 64% of their money towards deferred care. It was either used to pay for medical bills or stockpiling of medical supplies. Not only that, statistics revealed that the out of pocket expenses usually increase after people get their tax refund. This is a great option for you to use this money on yourself. Make yourself physically better so you can be more productive in your work. A healthier you also means you do not have to worry about future health expenses.
Think about your mental health
Another thing that you can work on is your mental health. Some people cannot reach their full potential because they are too busy battling, anxiety, stress or depression. You may want to use your tax refund to pay for professional help – to assist you in sorting out your thoughts. There are those who do not want to pay for this service because it seems like they are not right in the head. But your pride should not get in the way of your mental health. You have to be honest with yourself and make sure that your mental well-being is being given the attention it requires.
Give yourself a break
Finally, you can also use your tax refund to increase personal net worth by giving yourself a break. It is not advised that you spend the whole amount on this. But you do need to reward yourself. It can even be considered as something that will help improve your mental health. Of course, you have to make sure that you will not blow everything on this reward. You can go on a budget-friendly vacation to help yourself relax.