5 Things To Do With Your Tax Refund

Brandon Chhan

April 25, 2022

As a majority of Americans finished filing their taxes this past April 18^th, the IRS is refunding millions of dollars back to everyone who has filed and paid more than necessary. When you get a refund, you are essentially getting money back that you loaned interest free to the government. This isn't always favorable, but I won’t get too much into that. This month’s blog post is about some smart ways to better utilize your tax refund and make your money work for you.

1) Create an Emergency Fund

Emergencies can happen when you least expect them. According to a study from Bankrate in 2021, more than half of Americans (or 51%) have less than 3 months worth of expenses covered in an emergency fund¹. They even go further to say that of that 51%, 25% indicate having no emergency fund at all – up from 21% in 2020. That is very worrying. As financial advisors, we recommend at least 3 to 6 months of expenses saved up in the case of an emergency, ranging from medical emergency to automotive problems, or even job loss. Using your refund to start up or add to an existing emergency fund can help ease the blow should an unexpected expense arise.

2) Pay off Debt

If you carry a balance on your credit card or have student loans, using your tax refund to fully pay that off or even knock off a good amount can help you in the long run. Remember that credit card debt typically has high-interest rates tied to the leftover unpaid balance that compounds against you month after month. By putting that large chunk of refund towards your balance, it can help you save on interest expenses.

3) Fund your Retirement

If you don’t have any IRA’s, 401(k)’s, or any other retirement accounts, do not worry, you are not alone and there is still time for you to start investing for your future. With the money you have been refunded, you can open a traditional IRA (individual retirement account) or Roth IRA to contribute to for this year. You can also use contributions to your traditional IRA to lower your reported taxable income.

Referencing CNBC’s article, the average refund as of February 18^th, 2022 was $3,536². Now let’s take that number, for example, and invest it over the next 15 years earning an 8% average annualized return. What you get is $11,216.79, which is not bad. But it gets better if you commit to investing that same $3,536 refund in each of those 15 years. After letting it compound, you’ll have a whopping $109,974.27. Now that is a chunk of change that will make a difference in retirement.

4) Create a Will or Living Trust

Everyone needs an estate plan to help pass down everything that you own efficiently to your beneficiaries, even if it is not much. Without a will or living trust, your legacy can become one of chaos with fights and legal battles between beneficiaries. If your estate isn’t large or complicated, you may be better off using an online service that won’t break the bank. On the other hand, you can hire an estate attorney who will draft your living trust with no holes in place. It is important to remember that as you get older and your life changes, so will your needs with the trust. You will need to revisit it every few years to make sure it fits all your needs.

If you need help finding an attorney that specializes in trusts, reach out to us and we can refer you to a couple that have been great assets to our clients.

Treat Yourself

If you followed 1 through 4, I hoped you realized this is a mini step by step guide to financial planning, starting from building a foundation with a budget and creating an emergency fund, to investing for your future self, and lastly passing down your legacy to your loved ones. Even though we go over a lot of different financial planning topics throughout our blogs, there is always time for a bit of fun. So, treat yourself for all the hard work you have put in for yourself. Buy those shoes that you were eyeing or that plane ticket to your dream destination. All we would recommend is to not break the bank.

If you have any questions or need any other ideas/plans on how to use your tax refund, schedule an appointment with Tori or schedule an appointment with Alex to get them answered!

Best,

Brandon