4 Ways To Use Your Tax Return To Improve Your Financial Health

Why not use your tax return for something financially beneficial this year? We explore ways you can use that money to improve your financial health.

Now that we are deep into tax season, have you already filed your taxes? Are you currently thinking about all the fun things you want to buy with your tax return money? Well, before you get an online shopping order ready to submit the moment your tax return hits your bank account, consider this: wouldn’t it be much wiser to use the money to bolster your financial health? I bet your future self would really thank you if you made a concerted effort now to be much smarter with your tax return!

If you are wondering how you can use your tax return funds to improve your finances, no need to start Googling! In my experience as the CEO and founder of CMA Exam Academy (a Certified Management Accountant exam review program), I have discovered some effective ways that tax return money can be used for overall financial betterment. Here are four of them that are worth trying out.

1. Pay Off Unsecured Debt

Did you know that most Americans carry unsecured debt? From high credit card balances they racked up during their carefree college years to bills for medical procedures they didn’t plan for, this debt is not safeguarded by collateral. It can plague these individuals for years, possibly the rest of their lives. So take a look at your own finances — do you also have a high credit card balance that you’ve been paying the minimum payment on for months? Other unsecured debt that you’ve been meaning to pay off? Well, don’t let it bring you down any longer!

It’s time to be proactive in eradicating your debt so that you can maximize your long-term financial standing. And with inflation picking up steam and the federal government planning on increasing rates, those credit card fees are going to go up and make it even harder to pay off debt quicker for those who only make the monthly minimum payment. Therefore, my number one piece of advice is to get rid of all unsecured debt as soon as possible.

Use ‘Aging Buckets’

You can optimize your debt payoff efforts through the use of aging buckets — sort your bills according to whether they are late by 30-60 days, 61-90 days, etc., then gather the oldest bills and sort them from the highest outstanding balance owed to the lowest. Use your tax return money to pay off the largest bills in the oldest “aging bucket” and make your way down the list. Taking this calculated, strategic approach will help make the process of paying off your unsecured debt much more efficient and a lot less stressful.

2. Build a Rainy Day Fund

If all of your unsecured debt is paid off (or you didn’t have any to begin with), you can be wise with your tax return money by placing it in a rainy day fund. You really can never know precisely how the future will pan out – the unforeseen and devastating COVID-19 pandemic is just one example of the need to always be prepared for any situation. So use your tax return to start a rainy day fund or enhance the one you already have. An adequate rainy day fund should cover 8-12 months of expenses (monthly rent or mortgage, utilities, other bills, etc.) or whatever amount would give you the greatest peace of mind.

3. Invent, Invest, Invest

If you aren’t currently carrying any unsecured debt and you already have a hefty rainy day fund, consider investing your tax return money to get an even bigger payout later on. There are so many investment opportunities to choose from, from strong blue chip stocks that pay great dividends to mutual funds and retirement plans. Using a long-term approach with your tax return money could really help to bolster your future financial standing.

To be more motivated to invest your tax return rather than spend it, treat the money as if it never hit your bank account. The money was never there to begin with, so see it as if it was taken from your paycheck before it reached the bank for the sole purpose of being invested. Instead of spending it, this may encourage you to invest it for a bigger return in the future.

Launch an Online Service Business

The internet has made it so easy to launch a new online service business without a ton of capital — the only significant upfront investment is the time required to build and promote the company. When it comes to monetary expenses, you would need to buy a website domain name, a budget-friendly website template, web and email hosting, and freelance web design services, which your tax return money could easily cover. Once your website is set up, you can promote your online service business for free on social media. The money you make from your business could also help pay off any unsecured debt you owe!

The kind of online business you launch all depends on your skills. For example, if you are highly organized and love writing to-do lists and scheduling tasks, you could create a website to market yourself as a freelance virtual assistant. Or, if you are skilled in writing and editing, you can start an online copywriting business. Love all things SEO? Consider launching an online digital marketing agency! Because your business is online, you would have the ability to connect with and market your services to potential clients worldwide.

If you’re wondering what you should do with your tax return, don’t just spend it frivolously on items you don’t really need — use it to boost your current and future financial health! Use your tax return to pay off any unsecured debt you carry. Or, place the money in a rainy day fund or invest it to get a greater payout later on. You can also use it to launch the online service business of your dreams! These are just a few ways you can use your tax return to optimize your financial standing.

Related:

• How to Get a Faster Tax Refund
• How to Maximize Your Tax Refund
• 10 Ways to Put Your Tax Refund to Work

Reviewed March 2022

About the Author

Nathan Liao is the founder of CMA Exam Academy, a top Certified Management Accountant exam review program. As a CMA and CMA coach, Nathan mentors accounting and finance professionals in over 80 countries to earn their CMA certification in as little as 8 months. The unique review framework in CMA Exam Academy has proven to be the key to his students’ outstanding success in attaining their dream of earning the Certified Management Accountant certification.