Economy & Jobs

Save or Spend: 5 Tax Refund Tips for the Finance-Minded Millennial

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Happy tax season! While tax filing may be a pain, many taxpayers are looking forward to a nice chunk of change from their refund. According to the IRS, the average refund  for 2014 tax returns is a whopping $3,034. Of course, for those of you who live in states with no personal income taxes, you already get the benefit of having more money in your pocket from week to week. This can make your finance planning more predictable year-round while giving you better control and foresight.

So, the question is: Should you save or spend your tax refund?

Well, that depends. If you’re a Millennial drowning in student loan debt, throwing that extra money at your loans is a guaranteed return on your investment. Not to mention that it’ll feel great to see your debt numbers decrease. But for those Millennials whose finances are more secure, here are five things you can do with your tax refund.

1. Build Your Emergency Fund

Tough times come and go, and with them, money. Unexpected financial emergencies are a matter of when, not if. If you don’t have three to six months’ worth of expenses saved up in an emergency fund, stash your tax refund into a high-yield savings account. You’ll grow interest on it and be able to sleep better at night, knowing that you have the peace of mind to deal with tough times.

2. Invest in Your Future

For Millennials, investing may seem scary. Many of us have seen our parents’ portfolios tank during the Great Recession and because of that, our generation tends to be investing-averse. In fact, in a recent study, Millennials admitted that only about 28 percent of their finances were devoted to stocks. But if you want to keep up with the cost of inflation and build wealth, investing is the best way to do that. Start by funding a Roth IRA, or put the extra money toward your employer-sponsored 401(k). You can also dip your toes into the investing waters and use a tool like Betterment , which is an automated investing service that helps you manage your funds for the greatest return.

3. Launch a Side Business

Are you itching to try something new in your career? You might want to use your tax refund to help launch a side business. Think about your passion and what you feel called to do. Are you an amazing designer? A craft maven or tech wiz? Whatever your talents may be, give them room to breathe. Use your tax refund to help leverage your career through ongoing education, workshops, websites, and more.

4. Rebel With a Cause

Aside from building your financial foundation and focusing on your passions, you can also use your tax refund to help others in need. Donate to your favorite cause and feel good knowing that your dollars matter. Nonprofits accept tax-deductible donations, so you can get the dual benefit of supporting your favorite cause while earning a tax deduction for next year. Think about your passions that keep the fire in your heart burning. Pets or health? Education or the arts? Donating money is a good option, but only if all your financial needs are already met.

5. Mix It Up

Not sure whether you should save or spend your tax refund? Try a hybrid method of saving and spending. Commit to saving 90 percent of your refund, leaving you with 10 percent to spend. You can alter the percentages based on financial variables such as debt, retirement, and emergency funds. No matter what percentages you choose, you’ll get the best of both worlds with this method. After all, it is your hard-earned cash. But spend responsibly.

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Melanie Lockert is a freelance writer and passionate debt fighter who writes at DearDebt.com. She is currently climbing out of $81,000 in student loan debt and is often dreaming of her next adventure. Her work has appeared in the Globe and Mail, Rockstar Finance, GoGirl Finance and more. She has her M.A. in Performance Studies from NYU, loves karaoke, is obssessed with the Wizard of Oz, and is a ceviche connoisseur.

Comments

  1. This year I used my tax refund to pay down debt. It felt so good to not have splurged with my refund and invested in me. Becoming debt free will only make my life so much better.