What to Do with Your Tax Refund

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Unless you filed for an extension, you should have submitted your tax return last Monday. And if you haven’t… well, you better get your tax return in ASAP Rocky, or you’ll keep racking up late fees.

When you filed, you will have figured out whether you owe some money to Uncle Sam (boo), or maybe you are getting a refund back (yay)! If you are getting a tax refund, remember: this is not free money. Like I mentioned in my article How to Track Your Tax Refund (And Why You Actually Don't Want One), the cashola you get back from your tax return has always been your money; Uncle Sam had just borrowed a little more money that he should have, and now he’s paying you back.

Regardless, it is an exciting day when you get some cash that you weren’t expecting. And I know the temptation might be to go out and buy yourself something pretty— and okay sure, use a bit of your refund for a financial indulgence. I do think small financial indulgences keep you from overspending later on.

But a tax refund is such a fantastic opportunity to take a leap toward your financial goals, so you shouldn’t miss this opportunity by spending your entire tax return on a financial indulgence.

Instead, here are three things you should consider doing with your refund:

1. Pad your emergency fund. If you don’t have a chunk of money saved that would cover six months of your bare-bones expenses— you need to, before making any other money move. In the last few years, we’ve seen some shit: war, a pandemic, rising inflation, supply chain shortages, widespread layoffs, you get it. So, I don’t need to tell you that life is capable of throwing some major curveballs. An emergency fund is what keeps you from completely striking out.

2. Open a Roth IRA. If you haven’t set up a Roth IRA yet, now may be the perfect time. As a reminder, a Roth IRA is a type of retirement account that you fund with post-tax money, or, in other words, money that you’ve already paid tax on. So, unlike a 401(k) or traditional IRA, when it comes time to take money out of a Roth IRA, you don’t have to pay tax on the money you take out, because you already paid it! This makes your nest egg easier to account for over time. We can’t see into the future and predict what tax rates are going to be the year you retire, but, tax rates will likely increase, so those investing in a 401(k) or IRA have an unknown tax bill looming, while those with a Roth IRA will have no surprises! In 2022, you can contribute a maximum of $6,000 to a Roth IRA if you’re under 50. I recommend folks try and max out their Roth contributions every year. So, if you got more than 6 grand back from Uncle Sam, take your Roth to the max.

3. Index Funds and Chill. Another savvy money move when you have unexpected extra money is to invest it— and as you probably know by now, my favorite investment option for new investors is in Index Funds. As a reminder, when you buy an index fund, you are basically buying a little bit of several companies, instead of putting all your tax refund eggs in one company basket. If this would be your very first venture into the investing world: don’t stress. Index Funds are the perfect way to get your feet wet in the investing pool, because by nature of the way they’re set up, it’s much less risky than investing in one company.

xo,

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