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Getting a tax refund is like celebrating a delayed Christmas. But instead of spending money to be happy, you get money.
While there are plenty of ways you can spend your tax refund, there are also ways you can invest in yourself and your future. Here are a few ways to invest your tax refund.
1. Pay off old debt
If you’ve been struggling with old debt, such as credit cards, student loans or medical bills, now is the time to pay them off for good. If you’re not sure which debt to pay off first, consider the one with the highest interest. High-interest debt, like credit cards, can compound through hefty interest charges, late fees and other penalties.
You could also use it to get current on late-but-not-yet-outstanding debt. For instance, catch up on your electricity bill or pay down the principal of your student loan. The sooner you pay it all off, the less burden you carry.
2. Start (or build up) your emergency fund
If you’ve been just scraping by with your regular paycheck, you may not have the extra cash for an emergency fund. Luckily, your extra cash can help. Use your tax refund to start an emergency fund. This can be a high-yield savings account you keep separate from your regular checking account. It’s not an account that should be dipped into often — unless there’s an emergency — but you should have easy access to it.
If you already have an emergency fund, this is a good time to give it a boost. An emergency fund should consist of three to six months’ worth of expenses, which is different for everyone. If you don’t think you’d survive financially if you missed a paycheck, put your tax refund towards your emergency fund.
3. Start investing
Investing is different for everyone. It can be as small as microcontributions through an app such as Acorns, using a robo-advisor such as Betterment or managing your investments yourself through an online broker such as Robinhood.
Investing your tax refund is a great way to increase your return. While a high-yield savings account has APRs ranging upwards of 2%, the average stock market return is 10%. While you could stand to lose money in the stock market, you could expect serious gains as well.
Investing comes in many different forms. Before signing up with a company, determine if you’re more of a hands-off investor (best for robo-advisors) or a hands-on investor (best for brokerages). Also consider your risk tolerance and when you plan to use your money. Stock market investing is best for long-term investment, or money that isn’t touched for at least five years. So if you plan to use your investment money soon, you may want to consider other options, such as a savings account.
4. Contribute to your retirement account
Preparing for your future after your career ends is one of the most important financial contributions you can make. If you have a work-sponsored 401(k) plan and don’t max out your contributions, use your tax refund to do so. If you’re older than 50, use the extra cash as a catch-up contribution.
You can also use it to start or fund your IRA. Whether you have a work-sponsored retirement plan or not, contributing to your IRA gives you an extra cushion in retirement. IRAs also have catch-up contributions, which is helpful if you’re 50 years of age or older and don’t feel confident you’ve saved enough for retirement.
5. Start (or build up) your HSA
A health savings account is a savings plan specifically designed for health-related costs. HSAs are a type of investment account, even though they’re called “savings” plans. If you have a high-deductible health plan, you’re eligible to open an HSA. HSAs are triple tax-free: Your contributions, earnings and withdrawals aren’t taxed.
7. Save for college
Whether you’ve put off going to college yourself or you want to get a head start on your child’s education, use your tax refund to save for college. You have a few different options, like a high-yield savings account, an investment account or a 529 plan.
A 529 plan is specifically made 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 costs, you’re not on the hook to pay taxes on your withdrawals.
8. Invest in yourself
While college is a great self-investment, there are other ways you can use your tax refund for a good cause. If college isn’t on your radar, consider taking courses in a field or industry you’re interested in. If you’ve been contemplating a career change, use your money to invest in that switch. If you need capital to start your own business, this could be your chance.
Also consider using it to give yourself a much-needed break. Whether this is a vacation fund or simply money for a massage or spa day, your tax refund can help you recharge, reset and refocus. It’s easy to veer into other materialistic things, like shopping for new clothes or shoes, but try to stay focused on what would improve your well-being in the long-term, not a quick fix.