Get a tax refund? Here are 6 ways to invest in yourself
This story is partCNET’s coverage of the best tax software and everything you need to file your return quickly, accurately and on time.
Filing taxes is no fun, but getting a tax refund can be. In 2021, over 100 million refunds were processed and refunds averaged $2,873 – and unless you need the money to immediately pay rent or bills, that’s a good idea to plan in advance how best to use the funds.
Although it may be tempting to spend your money right away, consider using some or all of it to improve your finances. Here are several smart ways to put that money to good use for you and your future.
1. Pay off the debt
Whether it’s credit cards, student loans, buy it now and pay later services, or medical bills, living with debt can be overwhelming. Although your tax refund may not be large enough to wipe out these balances, you can use it to reduce your debt, especially high-interest debt.
Credit cards tend to be the debt with the highest interest rates, although this is not always the case. Paying off the debt with the highest interest rate first (aka the avalanche method) can help save you money down the road in interest charges. Additionally, with the Fed expected to raise rates as early as March, credit card interest rates are also expected to rise.
If you have multiple credit cards with similar APRs carrying debt, you can also choose to pay off smaller balances first (the snowball method) so you have fewer remaining credit cards to worry about paying off.
“Tackling the card with the lowest balance first can be a quick win and give us the mental strength to pay off remaining balances. “, says CNET Money Editor at Large Farnoosh Torabi.
2. Build or boost your emergency fund
An emergency fund is an important financial tool that can help you in the event of job loss, a pay cut, or an unexpected financial emergency (like a heavy medical bill). Your emergency fund should contain between three and six months of expenses, which is the amount you spend on things like rent, utilities, groceries, gas, and other essentials.
Your tax refund can help you create an emergency fund. A high-yield savings account that pays slightly higher interest rates that you can access quickly is a great place to store that money. Many online banks like Capital One, Ally and Marcus offer high yield savings options.
And, if you have debt you’d like to pay off and no emergency savings to speak of, you may not know how to best make your money work. “Spending time in the beginning to build up emergency savings first – even a few hundred dollars – can be extremely helpful before you embark on your debt repayment strategy. This provides a buffer for unexpected expenses that may not Of course, pay the minimum on all your card balances, while you work on building up savings, but once you have about a month’s worth of essentials set aside, be more aggressive with your debt repayment plan,” says Torabi.
3. Pay your future self
While it might not be the most glamorous way to enjoy your money now, investing in your future is important at any stage of your career. You can use your tax refund to contribute to any retirement plans you have, 401(k) or IRA. In 2022, you can contribute up to $20,500 to a 401(k) and $6,000 for traditional and Roth IRAs. (If you’re over 50, you can contribute an additional $6,500 to your 401(k) and $1,000 to an IRA.)
“If it’s not possible to maximize your retirement plan at work, consider investing enough to earn full consideration from your employer or contributing at least one to two percent more than last year,” explains Torabi.
And, if you’re already on track to reach your retirement goals, you could use your money to start investing. There is no one way to start investing; it will be different for everyone. If you want to invest with minimal risk, buying an ETF (exchange-traded fund) or an index fund may be a good idea. Both options spread your risk across different stocks and bonds that track a particular index, like the S&P 500. You won’t get rich overnight with index funds or ETFs. They are more of a long term game.
If you want to take a more active role in investing and don’t mind taking higher risks, you can invest directly in the stock market through a brokerage. A few online options for investing in ETFs, index funds, and stocks include TD Ameritrade, ETRADE, and Fidelity Investments.
For those who don’t want to be as active in the investment process, a robo-advisor might make sense. Robo-advisors like Betterment, Wealthfront, and Ellevest use AI to create a portfolio based on your financial needs and goals.
4. Add funds to your HSA or FSA
A health savings account is a savings plan specifically designed for health-related expenses. HSAs are a type of investment account, although they are called “savings” plans. If you have a high-deductible health plan, you are eligible to open an HSA. HSAs are triple tax-exempt: your contributions, earnings and withdrawals are not taxed. Your employer may also offer access to an FSA Flexible Spending Account, which is also a tax-free account designed for eligible medical expenses.
If you have a health savings account or a flexible savings account for medical expenses, you may want to use part of your tax return to fund this account. The 2022 contribution limits for an HSA are $3,650 for an individual and $7,300 for family plans. The FSA contribution limit for 2022 is $2,850.
5. Start a college fund
Whether it’s for a child or for yourself, you can put your refund to work by investing it in future college expenses. You have different options for storing this money, including a high-yield savings account, an investment account, or a 529 plan.
A 529 plan is specifically designed for college savings, but it acts more like an investment account. Earnings grow tax-free and as long as you use the funds for education-related expenses, you are not required to pay taxes on your withdrawals.
6. Invest in yourself
While college is a great personal investment, there are other ways to use your tax refund for a good cause. If you are considering a career change, use your money to invest in that change. If you need capital to start your own business, this could be your chance. Or use your funds to invest in courses, courses, or certifications that will help take your skills to the next level.
“Since it can take time for your new business to start generating revenue, having at least a year of financial trail or personal savings can be vital for both your financial security and long-term success. of your business,” says Torabi.
The stress of the past two years has weighed on us all. While paying off your debt, saving, and investing your repayment are smart ideas, investing in your mental health is just as important.
Consider using your refund to give yourself a well-deserved break, whether it’s a laptop-free getaway, a trip to see family and friends, or a relaxing vacation to recharge, reset, and refocus yourself. “Mastering your money is more than just managing your dollars and cents properly. It’s a much more holistic endeavor that focuses on your mental well-being first and foremost,” says Torabi. “Health is wealth.”