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Are you planning to get a tax refund this year? If so, it is important that you use it wisely. Tax season usually means frivolous spending for most people, but not for us money conscious people of the world who want to get the most bang for our buck. Let’s talk about the money moves we can make with our tax refund that will increase our net worth now and for the future.
Net worth is the sum of all of your assets subtracted from your liabilities or debts. Assets would include, but not limited to home value, cash, stocks and bonds, valuables, and other property. Liabilities include but are not limited to student loans, car loans, mortgage and credit card balances.
You never know when an emergency can happen, so it is important to be prepared as best you can. Did you know that 60% of Americans cannot cover a $400 emergency? What will you do if you unexpectedly lost your job? I was unexpectedly laid off from my job of 8 years. Thank goodness we had an emergency fund to cover our expenses until I found another job.
I recommend 3 to 6 months of expenses to be put away for emergencies. If you are just starting your emergency fund and you still have debt to pay, I recommend saving at least $1000 per adult and $500 per child. So a family of 4, 2 adults and 2 kids, will need to have at least $3000 of an emergency fund before focusing on paying off debt.
For more about planning for emergencies, read How to Make an Emergency Financial Plan
Paying off debts with your tax refund will definitely increase your net worth. Your debt is a liability. I recommend paying off your smallest debt first. If you have debts that are approximately the same amount, then pay off the debt with the higher interest rate.
$5,000 credit card @ 19.99% interest
$5,000 car loan @ 5.48% interest
Pay the credit card off before paying the car loan
For more about debt repayment, read The Ultimate Guide to Making a Debt Repayment Plan
Increase your net worth by using your tax refund for your retirement savings. If you do not already have a retirement investment account, get one. Investing in a Roth IRA or Traditional IRA is the easiest way to start a retirement account even if you already contribute to your company’s 401 (k).
For more about IRA accounts, read Roth vs Traditional IRA: Retirement Basics
Using your tax refund to invest in yourself is a great way to increase your net worth. Going back to college or attending a career focus seminar can increase your chances for a promotion. More money means increased net worth.
Does your kitchen need an upgrade? What about your roof or AC unit? Making home improvements can increase your home’s value which will increase your net worth. If you think you home is fine just the way it is, what about the energy efficiency? Use your tax refund to buy energy efficient windows and doors. This will lower your current utility bills while adding value to your home.
Take a look at your current interest rate and research what interest rate banks are offering. You will need your tax refund for closing costs. Yes, closing costs. You are essentially rebuying your own home. Refinancing your home will lower your monthly payment, leaving you with more cash each month to save or invest. Be sure to refinance your home with a reputable bank or credit union, there are a lot of refinancing scams out there.
If there is any equipment or software that will help you run your business more efficiently, now is the time to use your tax refund and make the purchase. Efficiency saves time, more time means you can take on more clients or projects and make more money.
How can spending your tax refund on something you want or need help your net worth? Money is a top stressor for most Americans. Let’s face it; having more money can make us less stressed. Stress causes health problems and health problems come with high doctor bills. Relax, take that vacation, replace your work shoes, do something that will make you smile.
If you are getting a tax refund, how do you plan to spend it?