Tax season is a time of year that’s dreaded by some and loved by others. If you are someone who is getting a tax refund this year, you are probably one who loves it and this article is for you. No matter how big or small your refund is, you can use it to your advantage to reduce your debt.
Here are 3 ways to use your tax refund strategically to reduce your debt.
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1. Pay off or towards a high interest credit card
Credit card interest rates varies depending on the type of card you have or your credit score. Many Americans have at least one credit card with an interest rate of 15% of higher. Just think, depending on how much your balance is and how much you pay on it each month, you might be paying hundreds of extra dollars in interest each year! Plus, if you only pay the minimum monthly payment it could take you years to pay off your card, even if you don’t make any more purchases.
Figure out which card has the highest interest rate. It could be a department store card or possible a card you opened years ago when you needed some extra funds. Also consider the balances on each card. It might be smarter to fully pay off a credit card with a small balance instead of paying towards the card with the higher balance. Paying off a card is usually a good way to go because it eliminates the debt and gives you extra monthly income by having one less bill to pay.
2. Invest It
You can always invest in the stock market, but make sure that you are wise and have the knowledge needed to be successful. Another way to invest that is a little bit safer is by investing in a 401k or IRA. You may be able to get a 401k through your job or you can get an IRA through your bank. It’s simple because all you need to do is invest a little each month or pay check and you will see how fast it grows! Plus sometimes your company or bank will match a percentage of your investment, something that definitely is smart to take advantage of. Take some of your refund and invest a good portion to add to the value.
Another way to invest is to invest in a startup you believe in or open up a small side or online business. This is almost always a high risk way to invest but the payoffs can be great if you are successful. You can do something as simple as starting your own dog walking or babysitting business. Or even start a website and make money through ads or selling a product. Try doing something that would have very minimal start up cost and can bring in a few extra hundred dollars a month. If you invest in a start up make sure you check out all the facts and legal agreements that come with it. Every great business has to start somewhere!
3. Invest in yourself
Another great way to use your refund is to invest in yourself. This could mean using some money to finish school and finally get that degree. Or maybe taking a class in financial education. Even just putting a large chunk into your savings account is beneficial to your financial and mental well-being. It’s good to know if something happens you’ll have extra money to get you through it.
You could also do something you’ve always wanted to do, like take a trip somewhere new or buy that pair of shoes you’ve been eyeing for months. Yes it sounds counter intuitive for those striving to eliminate debt but if you plan your purchases you will reduce the urge for impulse buying. If you know that you are saving for a new car then you will be more likely to say no to the Starbucks drink you were craving. So if there is something you’ve been eyeing and now you have the funds, either add some money towards it or buy the item you’ve been planning on, especially if it will add true value to your life.
No matter how you decide to use your tax refund money make sure to make a plan before you receive it. Avoid the trap of going on a shopping spree or making large unplanned purchases. You only get this extra money once a year so use it to your advantage.