In this post, we will discuss five ways to spend your personal tax refund productively.
The time has come once again. For some it is a time to get excited and ponder all the possibilities. For others, it’s a time to bite your nails, grind your teeth, and wonder how you will come up with money. If you are a good planner, business owner or just lucky; tax time can be a good opportunity to get some cash back into your pocket with your personal tax refund. For myself, I enjoyed several thousand dollars back. If you do find yourself with some extra cash back at tax time, you may be wondering what to do with it. It is possible to spend your personal tax refund and compound the effects to make more money.
Don’t be like most people. The average person will take their personal tax refund and blow it on liabilities. They will buy things like boats, TV’s, unnecessary clothes and generally things they do not need. If you want to get a better grip on your personal finances, then your personal tax refund is a great starting place. The thing that is funny is if you invest and spend your money correctly early on, later you will be able to buy all the boats, TVs, and clothes you can handle. Spend your money wisely and the effects will compound:
5 Ways to Make More Money Spending Your Personal Tax Refund
1. Pay off debts.
This seems like a no brainier, but not to everyone. Some of my past clients actually saw their personal tax refund as extra money in their hand even though they had thousands of dollars in debt. Let’s say you have a department store card at 28.8% interest that you are paying the minimum monthly balance of $50 on. If you put $2, 000 onto that card you would save yourself $12, 481.62 in interest. $50 a month with a $2, 000 balance would take you three hundred months to pay off that card. Seems worth it to me to take your return and pay off that card.
2. Invest It.
This all depends on what your definition of investing is. You could top up your work pension contributions or invest it in mutual funds. You could take your personal tax refund and put it into stocks, bonds, or any other paper asset. If you are uncomfortable with the current market situation, you could leave it in a high interest bank account or buy GIC’s. The whole idea is to make your money work for you instead of spending it on necessary items. Sticking with our example: $2, 000 put into a mutual fund that earns 8% annually would give you a value of $14, 680.35 in 25 years. That is more than seven times the value of your what your original refund was. I like those numbers.
These are just a couple of ways to increase your personal tax refund by spending it. Money has a great compounding effect. Just one change can make the value of your money increase substantially.
3. Buy or start a business.
This suggestion is not for everyone. Most of the people I talk to say they do not have enough time to start a business, or they have some grand fear about what a business really is. The truth is there are many businesses you can start and work at part time. I currently have a vending business and an online marketing business that I run while still working full time. It can be done. Some business ideas include:
- Online marketing
- MLM companies
I chose the above businesses because I know they all can be done part time and with minimal upfront costs compared to other businesses. Most MLM companies provide excellent training and mentorship. Usually, a couple hundred dollars will get you all the training and resources you will need to get started. I can also tell you from experience that you can run an online business for less than one hundred dollars a month. Do some research and see what you like.
4. Buy real estate.
Here is the basic idea: Use the money from your personal tax return as the down payment for a rental property. Rent the property out and let it pay for itself. I give this suggestion because this is one that my wife and I have done. We got back enough from our taxes to put down 5% on a $320, 000 4-unit rental home. The rental income from this is about $37, 500/year. We got a lot back form taxes because I am heavily invested in step #3. There are many tax advantages to having a business, especially if it’s a home-based business.
5. Pay down your mortgage.
This one is pretty simple. Put your tax return directly onto the principal of you mortgage, assuming you have that option. I would only say to do this if you have no consumer debt. It would make no sense to pay off a debt at 5% while still carrying debt at 18%. Putting money directly onto the principal of your mortgage could save you thousands of dollars over the long term.