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Deciding how to spend your tax return (and diversify your yearly tax return portfolio) can be both an exciting and an overwhelming task.
7 min read
May 17, 2021
Preparing for Tax Day in California is undoubtedly a daunting task. But coming up with what to do with your tax refund eases the pain in the best way. Deciding how to spend your yearly tax return can be both an exciting and an overwhelming task. While some know what they want to do with their money (or what they should do with it), arriving at the right decision can still take a good amount of deliberation and preparation. An accountant may urge you to save it all, much like a nutritionist would tell you to eat more vegetables and drink more water. But this doesn’t always lead to an end result that creates joy—it can even cause more reckless spending down the line as the fear of missing out sets in.
So yes, you should listen to your accountant and save some of the money and invest a portion of it, but you should also live a little. Here are 13 ways to diversify your tax return portfolio.
While it’s not particularly exciting, eliminating any debt—especially with companies charging high interest rates—can help you achieve greater financial success in the long run. Whether you need to pay off a credit card, make a final payment on a student loan that has a small remaining balance, get rid of the accrued interest on a loan before it is added to the principal amount, or make progress on a mortgage payment, reducing debt will help relieve stress and save you money in the future.
Make sure not to funnel all of your tax return into paying off debt, however. Save some to treat yourself to a dinner out, finally get that thing you have been wanting, or attend a fun event so you can make the most of your free money.
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Spending your tax return on a material item will bring temporary happiness, but spending it on an experience—such as a music festival, a road trip down Highway 1, or a staycation at a unique local hotel—will create lifelong memories. Being able to share the experience with other people will leave a lasting impression, too, and make it feel like a luxurious splurge, even if it only costs $100.
If you have always wanted to go abroad or indulge in an expensive vacation, then take this opportunity to create a savings account for it and set aside a portion of your return. Ask your accountant which method would be most beneficial for stashing away the money given your timeline—it might be opening a traditional savings account, or it could be investing in the stock market or cryptocurrency.
Take this chance to build up your skills, try something new, and get ahead in your career. If you have missed out on promotions or job opportunities because you lack a particular skill, enroll in a course and let your tax return fund your tuition; if you have always dreamt of becoming a business owner, invest in a business license and a website that can allow you to become an online merchant; if there is an industry conference that would help you network and move into a new career path, sign up for it and watch your investments pay off.
Out of all the things to do with your tax refund, donating is the most selfless of them all. Receiving money you weren’t expecting is a wonderful opportunity to support a good cause. From donating to a charity you believe in, to traveling to help build houses for those in need, to supporting B Corporations and other social enterprises that are improving the lives of people across the globe, there are endless ways to let your dollars have a positive impact. Supporting these causes doesn’t cost very much, but making the effort to do a good deed will lead to a feeling of joy that will stay with you long after tax season ends.
Getting peace of mind is one of the best ways to spend a tax return. This accountant-approved use of funds will provide a cushion for unexpected surprises like a flat tire, a reduction of hours at work, or an unanticipated medical bill. Being able to stash away enough money to cover three months of bills and living costs will greatly ease the stress that comes with the unknown and prepare you for more success in the future. Do not worry about putting away all the money at once; after you start your emergency fund, you can continually add to it over the years.
Invest in the stock market, set aside some money for your 401(k), or add funds to your IRA; no matter how you do it, reserve a portion of your tax return for your retirement account. The earlier you start saving and the more money you put in, the more interest you accrue over time—and the more money you will have when you retire. It may seem far off, but it is important to set yourself up for future success early to gain better returns later on.
Keeping your house in tip-top shape allows your investment to retain its value. So whether you are aiming to sell, hoping to refinance, or looking to get into the short-term rental game, fixing up your home is a smart way to use your tax return money. Make the effort to enhance curb appeal, fix the foundation, replace the windows with double-paned glass, or put in better insulation.
These alterations will not only earn you more money when you decide to sell, but they will also help you cut costs; for instance, changing out old windows, filling in any cracks, and sealing gaps below doorways can save you money on heating and cooling bills. So, if the repairs would boost your happiness or increase the overall value of your house, then they are worth spending your tax return on.
Do you have kids? Are you planning to grow your family in the future? If your answer is yes, then it’s never too early to start a 529 plan—a tax-advantaged investment plan designed to encourage saving for future higher education expenses. In other words, spending your tax refund to build or grow a 529 plan means saving up for your kids’ college tuition.
Higher education expenses have been growing year by year and show no signs of stopping. Your state may give you a tax deduction or credit if you invest in your own state's plan, and California is home to some of the world’s best colleges. To find out more, visit savingforcollege.com.
You’ve spent more time working from home this year than ever before, so you probably already know what you’d change about your work-from-home situation. This makes upgrading your home office a no-brainer when it comes to deciding what to do with a tax refund. Your office needs love whether it’s a designated room or a desk in the corner of your bedroom. A new chair, standing desk, and better lighting are a few enhancements that most home offices could probably use.
You’ve been wise and put a lot of thought into deciding what to do with your tax refund. Why not put a portion of your tax return aside to treat yourself? You deserve it. A nice dinner at a Michelin-starred restaurant in the Bay Area, a high-end material purchase, or a luxurious day at the spa—you've earned it. The key here is to not let your once-in-a-while purchases turn into an unsustainable lifestyle habit.
Have you ever wanted to go skydiving in California? Hot air ballooning over Napa? Going on your first ever solo road trip? Use your tax return to fund your bucket list dreams and try something for the first time. Gifting experiences to yourself not only helps you make unforgettable memories, but it also enhances your life in myriad ways. So, expand your horizons, get out of your comfort zone, and spend your tax refund to do something you’ve always wanted to.
Sometimes, buying presents for your loved ones gives more emotional satisfaction than receiving. If someone important in your life has a milestone celebration coming up, use this chance to give them a gift they deserve. Similarly, if you have someone in your life who has always been there for you, use your tax return to thank them for their unconditional love and support. You likely already have someone in mind as you’re reading this, so you know exactly what to do.
Are you nearing an important birthday? Is getting married a possibility in the foreseeable future? Use the money from your tax return to host the celebration of your dreams. Albeit not an investment that pays back, this thing to do with your tax refund is a splurge that’ll enhance your important days significantly. After all, who wouldn’t want to look back on their anniversaries with complete satisfaction and zero regrets?
However you choose to spend your tax return, try to diversify your investments and find a balance between what you need and what you would enjoy.
When in doubt, ask an accountant for advice on how to best set aside money for different applications to get optimal returns—and watch your money work for you.
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