Ah yes, that wonderful time of year that Uncle Sam makes it rain with vacation money. If you're like the average Millennial, filing your taxes can be a pretty stressful experience. In fact, almost 80 percent of Millennials are afraid of the tax process, but we sure aren't afraid of those tax refunds.
The truth is, tax refunds are actually a bit of a junk punch. The government gets its bloated, wasteful hands on your paycheck before you ever even see it and takes out “their cut” as an interest-free loan from you. They hold it throughout the year, and then reluctantly give it back when they want to. The whole thing kind of blows honestly.
Here's the deal; If you are going to get a refund back, you might as well do something awesome with it that will boost you past your peers later down the road. That vacation in Cabo might seem epic now, but you won't even remember it when you're living paycheck to paycheck on a social security system that might barely exist in 40 years. Here are nine smart ways to build wealth with this year's tax refund:
1. Invest in a tax-qualified retirement plan (aka your future).
If there is any silver lining to the tax refund, it's that it is basically money that the government forced you to save. Putting that money into a tax-qualified plan like a Roth IRA or traditional IRA is a great plan. Have a 401(k) with an employer match instead? Great. Double that money, homie.
2. Start an emergency savings fund.
Did you know that one fifth of Millennials don't have emergency savings? Even having as much as $1,000 in a savings account will put you in the top half of savers for our generation.
3. Open up a brokerage account.
A tax refund can be the perfect vehicle to dip your toes into the investing world. If you are just starting out, purchasing ETF's (exchange traded funds) can be an effective platform to begin building your portfolio on.
4. Pay down high interest debt.
Have some student loans that are in the 6.8 percent range, like I did? Your tax return could go a long way to help you pay down your debt faster. Make sure you allocate the funds to the higher interest rate loans first, and if there is anything left over use the refund on your lower interest debt.
5. Save for your health.
You never know when unexpected health scares might come up, even at our age. Chances are you probably have a high-deductible health care plan, so you will get little benefit from your insurance for the first $5,000 or $6,000. Setting your tax refund aside could be the difference between paying cash for health expenses or going into debt to cover the costs.
6. Put it toward a down payment on a house.
We're all tired of paying rent and helping someone else get wealthy with our hard-earned money. The only way to really break the cycle is to buy your own home, but it takes a saved down payment first. Even one year's tax refund could get you out of a month or two of rent later on.
7. Start a college fund for your children.
Everyone is aware of rising tuition costs, and unless something drastic changes after this election cycle there isn't an end in sight. You'll probably want your kid to go to college, so help them do it without debt for you or them.
8. Purchase life insurance.
This is especially important for people with large amounts of student loans. Life insurance can be the difference between financial stability and massive debt for your family if your private student loans are passed on in the event of your death.
9. Use it as seed money for a business.
The average tax refund is around $3,000 dollars. While that doesn't seem like enough to start a business, it actually could be. Use your refund as seed money to buy your first inventory and legally set up a company or even start your own blog.
The moral of the story is you can't waste your refund on vacations or Amazon gift cards (you have nobody to blame but yourself if you fall for that crap). Your tax refund can be unbelievably powerful if you use it correctly. For more on taxes, check out this article where I show you how to turn a $3,000 dollar refund into over $600,000 dollars.
This article was originally published on Millennialmoneyman.com.