Thanks to Drivetime for partnering with us on today's post!
5 Smart Ways to Use Your Tax Return
If you’re getting a tax return this year, you may be gleefully thinking of all of the things you can buy with that “free money” coming in. Shoes, coach bags, fancy dinner date nights… you earned it right? But each of those purchases just put you further behind in your goals. I wanted to tell you more about the purchases that will get you closer to your goals!
It’s important to note that the “free money” that Uncle Sam is sending your way is just an interest free loan that you’ve given him for the last year. You can learn more about how to correctly set up your tax withholding here so that you get that money in small increases every paycheck. That being said, if you know yourself well enough to know that you won’t use the extra money coming in monthly wisely and you will use the large lump sum return at the end of the year wisely, then I fully support you getting a return even if it’s not the best course of action on paper.
Because the best course of action is always the thing that gets you closer to your goals taking into account your unique personality.
The smartest ways to use your tax return will always be something that reduces your interest paid, reduces your monthly payments, or builds up your net worth. Basically you’re sacrificing that new coach bag that you want and making your life easier for the next year or more.
This strategy has worked for us for the last several years giving us a very motivating boost towards our goals every year.
The top 5 smartest ways for you to use your tax refund:
Pay off credit card debt.
Especially if you can wipe out an entire card at once. We once lived on a super tight budget for a month to get a little extra money to combine with our tax refund to completely paid off a credit card. It saved us $118.00/month and wiped out $7,000 of our debt in one day! Plus, seeing those quick results kept us motivated to continue for months.
Trade in your car.
One of the smartest things we’ve done in this journey is to sell our nice fancy car (you’ll get the most money selling privately) and then buying a used car. We ditched our $300 monthly payment and bought a super cheap van. If you’re terrible at haggling, you can check out Drivetime for haggle free prices that are guaranteed here (available nationwide). (And don't feel bad… I love budgeting, but I’m the world's worst price haggler). You can learn more about buying a used car with your tax refund here.
Set up or finish an emergency fund.
The key to an effective emergency fund is making it hard to access the money immediately and finding a way to make yourself forget about it. It’s too easy to use it as a backup if the money is in your main bank account.
When you see the money every day, you start to think, “Well, if we go over budget, we can borrow a little from the emergency fund”. That's a common way of thinking, but it will quickly depreciate your emergency fund. What works for us is to have the account in a reputable online bank away from your usual bank account. If we need the money, we would need to set up to transfer to our bank ( which takes about 2 days).
Tackle needed home improvements.
Your house is likely your biggest investment. Is there something that would increase the value of the home as well as make your life a little easier? That’s a great thing to apply that refund to. It can also be used for a repair that's needed, or set aside for a repair that will likely be needed soon like draining the septic tank or replacing the roof.
Start a side hustle.
I’m not saying chuck your nine to five and live by the seat of your pants or anything. But I’m a big believer in doing work that you love. If you don't love your current job, than you should absolutely brainstorm a side hustle that you can do part time while you work. Use the refund for start up costs, training or supplies and work your heart out until it can be your full-time gig. Fun fact: That’s what I ended up blogging full-time from home.
If you approach this sensibly and look for smart ways to use your tax refund then that money will be paying you back for years and years. Ours certainly did!
Thank you to drivetime for sponsoring this post! All opinions are all mine.