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Smarter Ways To Use Your 2020 Tax Refund

You’ve filed your taxes and are expecting a big refund check, now what comes next? Receiving a refund often feels like an added payday, and it can be incredibly tempting to spend it on a new gadget, spring clothing line, or a weekend getaway — all things that you don’t really need.

The truth is, your tax refund isn’t a bonus check.  It’s money you overpaid for your taxes.  There’s a better way to spend your refund this year.  It’s an opportunity to invest in your financial future.  Let’s take a look at a few ways to make the most of your money. 

Adjust Your W-4

Adjusting your W-4 may not be directly tied to optimizing your refund, but it does speak to the nature of the refund in the first place. A big refund means you’ve been lending your money to Uncle Sam interest-free, and he’s merely returning what’s yours. 

It’s time to adjust your withholdings on a W-4 to ensure that you stop paying too much in taxes (if you have to pay taxes, you are not paying enough). You need to update your form whenever your tax status changes, such as becoming married filing jointly, head of household, or any major personal life change. Updating your W-4 regularly ensures that you are, in fact, paying the right amount in taxes.

Keeping more of your money upfront can catalyze your investments — increase 401k contributions, add to your brokerage account, etc. There are several ways you can put your money to work earlier by retaining as much of your paycheck as possible (and legal). You can adjust your W-4 at any time of the year, but the later you do it, the less impact it will have on your taxes that year, so the earlier the better.  Just do it.

Pay Off Existing Debt

Did the aftermath of the pandemic have you relying on credit cards to pay some of your bills? It happens and it’s okay, but now is the time to help get yourself out of that high-interest debt. The average tax refund for 2019 was just over $2,700 — let that money help you get out of debt.

When paying off debt, start with high-interest debt first and work your way back. Once you’re rid of that weight, your cash flow frees up because your monthly payments will go down.  The extra money can be reallocated to fund other goals. 

Fill Up Your Emergency Fund

If 2020 taught us anything, it’s to not push off a well-established emergency fund. We recommend saving 3-6 months of living expenses in a highly liquid account. Having the extra cash gives you freedom and opportunities in high-stress situations.

The right cash reserve can keep you from taking on unnecessary debt through loans, credit cards, or borrowing money from family and friends. To put it simply, life happens. You lose your job, you have a medical emergency, your car breaks down — your emergency fund helps stop these from becoming a major crisis for you and your family.

Invest It

When it comes to long-term investing, the extra cash from your tax refund can help to springboard your 2021 investment plan. Strategically adding to your accounts is a great way to take advantage of compound earnings and catalyze your wealth-building journey.

You can invest all of your refund in one account or split it into more than one account. You can add to your IRA, 401k, or brokerage account or all three. Analyze your long-term goals and invest in the account(s) that make the most sense.

Investing is more than just your 401k, you can also use your refund to start investing in yourself. You are the most important asset to your business and career. Is there a conference you’ve been dreaming to attend or a piece of equipment that would help level up your career? This is a great opportunity to invest in your professional future. Keep working toward your long-term goals and dreams.  Using the refund can help to start what is needed to fund the life you want. 

Try A Combo

You don’t have to spend your tax refund all in one place — you can put in a little towards your emergency fund, more towards your debt, and some for retirement. A great option is to allocate the funds to the places that will help you achieve your top two financial goals. For you, that might mean shoring up your emergency fund and adding to your brokerage account or chipping away at your debt and adding to your 401k.

Everyone’s financial goals are unique to them, so talk with your financial advisor about how you can best allocate your 2020 tax refund.

At Pro Wealth Management, our mission and goal are to alleviate the financial stress of long-term planning and help you reach your goals. Be strategic about your tax refund this year and make your money work for you and your goals. As financial experts, our team at Pro Wealth can make the process simple — contact us here.