If you are one of many Americans who are getting a tax refund this year, you have an important decision to make. If you are still looking for ways to spend that money, I would like to add my two cents and offer a few alternatives… we’ll start with the most rational options!
Pay down your debt
One of the most important steps to financial independence is living debt-free. The last few years have forced many Americans to use credits cards for personal emergency situations. Even if you still live on credit, try eliminating this form of debt as soon as possible. In the long term, it is the worst possible form of borrowing where rates start around 15% and typically hover around 25%. In an economic environment where banks pay close to 0% on your deposits, credit card terms are preposterous and should be avoided at all cost.
Other type of debt that you may have is a car or student loan. Even though they sound relatively innocuous, you most likely pay between 5-10% on those loans and should consider paying them off unless you have more pressing needs for the refund.
Invest in yourself
Education is a long-term benefit that does not depreciate. Refund money presents a great opportunity to take a class or professional development course and gain skills related to your hobby or one that will help you advance in your career. Newly acquired abilities can help you venture into new a profession or solidify a current role.
But self-improvement does not have to be purely educational experience. You may hire a career coach or personal trainer to assist you in achieving other personal goals.
Invest in your future
If you’re not convinced about the two previous ideas, consider saving for retirement. Take advantage and contribute some amount to tax-free retirement accounts or contribute more to your savings or investment account. Your extra savings can become your emergency fund to avoid going into debt in crisis situations. If you set a specific goal, it will be much easier to focus on achieving it and you won’t be temped to spend it on something else before you reach your objective.
Go on vacation
This is the last of my recommendations not by coincidence. It may sound counter-intuitive to spend money on trips when discussing productive spending but my reasoning is the following: everybody needs to occasionally take a break from a daily grind and recharge batteries. A trip is a great solution as it removes you from familiar places and lets you lose yourself in new cultures and experiences. It is a great bonding moment for all types of relationships and often opens up your eyes on new ideas. It may sound trite but that fresh energy you bring back is often a push in a right direction to reach your goals.
So, what will you do with your tax refund this year?