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Project yourself forward in time. It’s April 2018. Your direct deposit tax refund just hit your bank account. You’re feeling on top of the world. You think to yourself, “Maybe I should treat myself to a nice steak dinner…” Snap out of it! Your refund doesn’t automatically make you a millionaire. Instead of buying a new wardrobe or enjoying a night of fine dining, think about the best ways to make that money work for you.
Not sure what those could be? Read on. I’m going to list a few responsible things you can do with your 2018 tax refund. (Trust me: You’ll thank yourself later.)
1. Pay Down Debt
According to GOBankingRates’ 2017 survey, 38% of respondents planned to use their refund to pay off debts. This might not be the most exciting option on the list, but paying off your debts is an important step to financial freedom. You should strive to be part of that 38%.
If you have different types of debt, it might be difficult to prioritize what to pay first. Should you put $1,500 toward your $20,000 in student loans? Or should you pay off your $800 credit-card balance?
The answer to this depends on what motivates you. You can either knock out smaller debts first so you can see those balances drop to $0, or you can tackle debts with higher interest rates, regardless of debt size. The interest rate option will most likely save you more money in the long run but, personally, I like to see my smaller balances disappear.
2. Invest in Yourself
I’m referring to personal investment, the kind that involves expanding your knowledge or furthering your career goals. This can include taking a one-time class, signing up for a certification or learning a completely new skill.
On a professional level, I recently enrolled in a Poynter course to earn a reporting certificate. On a personal level, I bought a few Japanese language courses through Udemy for a grand total of $30.
These types of purchases aren’t usually factored into an everyday budget, and if you’re living paycheck-to-paycheck, it’s hard to find the extra money for it. By using your tax refund, you can invest in yourself guilt-free – talk about growth!
3. Put it Toward a Side Hustle (for More Money!)
If you already have a side hustle, or are planning on starting one, use your tax refund for any startup costs or improvements. Maybe you want to start you own blog but haven’t had the funds to purchase a domain name or WordPress subscription. Do you work as a photographer on the side? Now you can afford some extra equipment.
Again, this isn’t the time to “treat yo’ self” – consider purchasing items that will help you make extra money on the side.
4. Save or Invest It
What if I told you to pretend you never got a tax refund? Instead, stick that bonus money into an investment or savings account that earns interest and forget about it.
If you don’t have a designated savings account, open one (and snag a new-customer promotion). I’d also recommend having a savings account with a bank separate from your checking so you aren’t tempted to easily transfer the money back.
For investing your money, download a micro-investment app like Stash or Acorns and deposit your tax refund. With a micro-investment app, you won’t have to pay a financial advisor and your money still accrues interest. Plus, it’s pretty cool to be able to say you’re an investor.
5. Use the 50/30/20 Rule
The 50/30/20 rule is a common budgeting tactic that breaks down your income into manageable percentages. The normal rule is you should spend 50% of your income on “needs,” 30% of your income on “wants,” and save 20%. Instead of using that rule for an everyday budget, I’m going to switch it up for your tax refund: You should save 50% of your refund, invest 30% and spend 20%.
Yes, I said it – spend 20% of your refund on something you want! But only if you save most of it first.
There are countless different ways to spend a tax refund, but you should choose the option that makes the most sense for you and your financial health. After all, I guarantee it’ll feel better to start an interest-earning savings account than it would to buy a 4K TV.