By Chris Haymon, Personal Finance Writer
Are you expecting some money back from the government this year? If so, there are some great ways to turn your tax refund into life-changing opportunities. Here are some ideas for giving yourself a fresh perspective with your tax refund.
Pay off debts
If you have a pile of debt, you aren’t alone. Some statistics indicate most Americans carry nearly $16,000 in credit card debt, and on top of that, we have mortgages, car loans, student loans, and the like. It appears debt can actually damage your mental health, creating stress, anxiety, depression, and resentment. It can also limit your possibilities in life, keeping you in a job you hate or preventing you from getting the house you want. If you’re living with debt, consider using your tax refund toward paying it down, and develop a plan for paying off debts. Start with creating a realistic budget based on your income and monthly bills, pay extra on your debts each month, and don’t add to your debts. It can take time, but it’s worth it to get out from under the shackles of old expenditures.
Use it for seed money
Do you dream of being your own boss? Perhaps you’re debt-free and ready to apply your refund to a new beginning. According to some studies, pursuing a career you’re passionate about can lead to increased success. So if you have a budding idea, your job isn’t a good fit, or there is something you always wanted to do, putting your refund toward establishing a new career could be a great step and improve your quality of life.
Becoming an entrepreneur involves certain risks and requires a strong commitment. You can take a quiz to see if you might have what it takes, and consider dipping in through a relatively low-risk and low-cost venue like e-commerce. E-commerce is highly profitable, and all you really need is a well-designed website and a unique product. This guide from Oberlo can help you get started off on the right foot.
Spending versus saving
How much money do you have in savings? You might be surprised to learn setting money aside is a great way to improve not only your financial situation but also your psychological situation. Some experts feel there are important mental health benefits from saving money, like improved discipline, raised confidence, and better peace of mind. We all have unexpected expenses from time to time, such as car repairs and vet bills, so having a little padding can help you through those hiccups. The Balance suggests homeowners should budget one percent of their home’s value for routine repairs, such as roof replacements and worn out appliances. You can use an emergency fund calculator to help determine what would be ideal in your personal circumstances, and use your tax refund to give you a head start.
Invest in the future
If you’re a parent, saving for your child’s future might be one of the first things that came to mind when thinking of where to invest your refund. And there are a few particularly good options to consider. One of the primary college savings accounts is called a 529 Plan, and the other is called an ESA, or Coverdell Education Savings Account. There are pros and cons to both, and what is best will depend on your circumstances. For instance, there are income limitations for the ESA but not the 529 Plan, but both plans are tax-free. Another option is a custodial account, called a UTMA or UGMA, which stands for Uniform Transfer/Gift to Minors Act. In this case, an adult, usually someone like a grandparent, manages the money until your child turns 21. These accounts offer you tax advantages as well but note your child can use the funds for things other than college.
When you receive your tax refund, consider using it toward something refreshing and substantial. Reduce your debts, create a job you love, or save for the future. As a result, you can enjoy better mental health and improved quality of life.