Tax return season is upon on, and this is good news for lots of Millennials. It’s great to get a lucrative return, but what to do with this large sum of money is another question. Below are 5 ways to use your tax return wisely.
#1 Pay off existing debt – highest interest first
If you have existing debt this is a good chance to pay off a huge chunk at once. Pay off whatever debt has the highest interest rate first, usually credit card debt would fit this. Paying off debt early will save you lots of money in the long run, as you will be paying mostly principal on the loan, not interest payments.
#2 Start or add to an emergency fund
Having an emergency fund is key to financial freedom. You never know when life is going to give you some trouble, and having a backup fund for these rainy days will keep you afloat. Cars break down, people get sick, jobs can be lost, a tooth could be chipped, the list is endless. Most financial planners say anywhere between 3-9 months’ worth of living expenses make an emergency fund. If you can’t start with that $1,000 is a good security blanket.
#3 Spend it on something you need
There always seem to be a few things you should probably do, but you keep on pushing out because it’s not urgent. Whether it’s buying new tires for your car, taking a pet to the vet, home repairs, etc. Now is a good chance to spend it on something you need.
#4 Invest it
My favorite one! The average tax return is $3,120. Let’s say you are 25 years old, and plan to retire at 65. Over these 40 years, if you have an average tax return ($3,120) and invest the money (at a modest 8% interest rate) you end up with $940,697. Almost one million dollars! You would have only put in about $125,000 (3,120 x 40 = 124,800), and end up with $940k. Sounds like a good deal to me.
#5 Start a business
Often times the biggest obstacle to starting up a business is the initial cash. Now is your chance to pursue an idea you’ve had. Need an idea? Here are 101 ideas for side gigs while you work a full time job.
My personal return was about $2,000. I am putting 75% of it towards student loan payments, and the remaining money I am adding to a savings account with the goal of buying a house.