2/27/2013 3:23 PM ET|
7 ways to make money with your tax refund
They say it takes money to make money. If you're about to get a tax refund, here are 7 ways to leverage that cash into more.
This post comes from Brandon Ballenger at partner site Money Talks News.
But a January increase in payroll taxes meant a smaller paycheck for most Americans going forward, so fewer people will run out and buy a new TV or car with the windfall, predicts the National Retail Federation. Nearly half of those expecting a refund plan to pay down debt, and an additional 40% will put it into savings.
Good thinking, but can you do more?
If you're not sure what to do with your refund this year, here are some ideas that will make you richer.
Use your refund to reduce high-interest balances. Not only does this cut down the interest charges and overall amount you owe, it may also improve your credit score by lowering your credit-utilization ratio. A better score can mean easier access to credit at better interest rates.
Look at it this way: Paying down an 18% interest credit card is like earning 18%, risk-free and tax-free. There aren't many investments offering returns like that.
2. Create an emergency fund.
Living paycheck to paycheck often means there's never enough to get ahead. Use your refund to build a financial cushion, ideally enough to cover at least three months of living expenses. Then bills always get paid on time, which saves late fees. You never need a cash advance, saving fees and high interest. Plus, you can stock up on bargains at the grocery store and other places.
If you already have an emergency fund, set the money aside for something you know you'll have to replace eventually, like a car.
3. Save on insurance.
Many car insurance companies offer a discount if you pay the six- or 12-month premium in full. Use a chunk of your refund to do that, and put the rest in a savings account so you can raise your car insurance deductible -- a simple way to save 10% to 20% on your premium.
4. Create a tax break.
Make energy-efficient improvements to your home, pump up a retirement plan, or donate to charity, and your tax refund will be doing double duty, because you'll be creating a tax credit or deduction you can use next tax season.
5. Start a business.
Use your refund as seed money for a side business or for classes in a skill you've always wanted to learn. You could launch a website, sell your own arts and crafts, or start a garden and sell your extra fruits and veggies at a farmers market. Boosting your skills might be good leverage for a raise.
6. Think big.
If you're going to blow the money, at least make it an event to remember -- skydiving or something else you've dreamed of doing. In short, if you're going to spend the money, don't make a purchase, make a memory.
You could start funding a 529 college savings plan for your child or open an individual retirement account for yourself. Earn 10% annually for 20 years and your $3,000 refund will blossom into $20,000. Make it a habit and invest $3,000 every year for 20 years, earn that same 10%, and you'll end up with more than $200,000.
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