8 Ways to Make the Most of Your Tax Refund - Don't Miss #5!

Hey everyone, welcome to another edition of We're Talking Money. Let's say you just got your tax refund and you're not sure what to do with it. My name is Phil Clark, and if you're like most Americans, you're probably wondering what to do with your tax refund that's just around the corner.

In this video I'm going to show you eight ways that you can use your tax refund to improve your life. Whether you want to save for a rainy day or maybe even take a vacation, I've got something for everyone in this video. So sit back, relax, and let me show you how it's done.

Okay, before we get too deep, let's be sure everyone understands: what is a tax refund? Well, basically it is some or all of the taxes that have been paid in excess during the previous year. As a taxpayer, you can elect, by the way, how much is withheld from your earnings. If you have too much taken out of your paycheck, and this is something that only you would know and you have to check on this, but if you have too much taken out of your paycheck, you will likely overpay and thus get a refund on the amount that exceeds the actual amount you owe.

What this means is you are simply getting back what you overpaid. Just like the name says, it is a refund of your overpayment. This is not free money.

Now, refunds can also be the result of falling into a lower income tax bracket, receiving certain credits, or maybe having more deductions and exemptions than you anticipated. Either way, tax refunds are better described as getting back money that you have loaned Uncle Sam. Worst of all, Uncle Sam doesn't want to pay you interest for letting them borrow your hard-earned money. So what can you do with this refund to make your financial life better?

Well, first, you could pay off high interest credit cards. If you have a high interest credit card, these things can choke your financial situation. They're not good, and most people use credit cards at some point in their life. Now, I'm not saying don't use a credit card. I'm simply saying if they're charging you excessive amounts of interest and you're carrying a balance, one of the things you could do with your tax refund is let's get rid of some of that debt.

Credit card debt is often considered, and certainly by me, to be bad debt. Why? Credit cards are used to purchase non-appreciating assets, and you pay a lot more for them with huge amounts of interest.

Number two, create an emergency fund. Now, over the last few years, inflation, we all know about that, has reduced the average savings account for many Americans, and that might be you. For some, this means emergency savings accounts are below acceptable limits. Now, most experts, including us, recommend having at least three to six months of expenses saved in the form of an emergency account.

Research tells us, unfortunately, that half of Americans have less than three months of expenses saved, and based on what we look at in terms of our research, I would argue that that number is even lower, because savings rates are down, credit card use is up. So if your emergency savings is low or non-existent, which I hope it's not, but if it is, start building or adding to your emergency reserves with your tax refund.

Number three, invest in yourself. There's no better investment than you. That can only mean good things. So use part of your tax refund to invest in yourself, or maybe it's your child. Consider taking a class, a workshop, maybe something along those lines that will help you reach financial goals. Whatever the case, investing in yourself, we find that to be one of the best ways to use your refund, since education has always been shown to improve salary potential, sense of fulfillment, and even health.

Number four, start investing. If you don't have an investment yet, or an investment account, well, now is the perfect time. If you have a refund that you don't need for other things, starting some investment programs could be a great use for those monies.

Another part of that, and this would be number five, is saving for retirement. So not just saving or investing, but now more focused on retirement. Most people come up short when it is time to retire. They don't have enough. Tax refunds could be a great way for starting your retirement savings plan or fortifying an existing plan.

Now, if you can afford it, contribute your refund into a retirement account like an IRA, a Roth IRA, or even a 401k. Make sure that you use the right tool for the job. For example, traditional IRAs can help you save on your taxes now, because you get a tax deduction for the contribution. But if you're getting a tax refund, there's a pretty strong chance that a Roth IRA might be a better fit. You don't get to deduct your contributions in the Roth, but these dollars are never subject to tax, including growth. What an awesome way to invest. Be sure to check the income phase-outs, by the way, to be sure you qualify for a Roth.

Number six, increase your home value. If you have adequate emergency reserves and retirement savings are on track, and you aren't carrying any credit card debt, you could use your tax refund to invest in your home. That tends to be an appreciating asset. So consider funding a renovation project that might increase the value of your home and make it a better option for resale. Now, if you don't plan on selling your home anytime soon, focus on changes that not only improve the value, but perhaps they would improve your family's overall quality of life.

Number seven, charitable planning. Consider putting some of your tax refund behind a cause that's close to your heart. It's emotionally rewarding, and it may come with the added possibility of some tax benefits. But remember, keep your receipts if you plan to itemize in the following tax year.

And number eight, splurge, but responsibly. Tax refunds can be a great way to treat yourself, but whatever you do, make sure you're doing it wisely. Don't spend it all on a vacation or a splurge. Make sure that it's a wise decision that benefits you now and down the road.

And don't forget, if you're getting a refund, consider changing your withholding. You're probably overpaying, and you're simply then getting back what's already yours. And stop making these interest-free loans to your least favorite uncle, Uncle Sam.

Now, we hope this video has inspired you to look a little closer at how to best use your tax refund. Remember, a refund is anything but free. If you have questions or need help with your refund, the professionals here at OmniStar are happy to help create a brighter future.

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