Wherever you are on the journey to financial independence, consider these ideas to get the most long-term mileage out of your tax refund.
Increase the size of your emergency fund.
Everyone should have an emergency fund set aside.
A variety of unexpected events, from medical emergencies to broken down automobiles to roof repairs to plumbing difficulties, hurl curveballs at us on a regular basis. These curveballs are costly to dodge.
If you don’t have at least $1,000 in an emergency fund, you should start with this amount. Ultimately, you should aim to have between two and six months’ worth of living expenses saved up in an emergency savings account.
What you need in reserve is determined by how solid your income and expenses are – persons who have secure, consistent earnings and living expenses require less in reserve than those who have erratic incomes or expenses.
Even yet, persons who are saddled with high-interest debts should work to pay them off before completely depleting their emergency fund.
Get Rid of Your Unsecured Debt
When you’re paying double-digit interest rates on debt, it’s difficult to accumulate money.
In the event that you have credit card amounts that carry over from one month to the next, begin by paying them off first.
You should pay off your credit cards in full every month because interest rates on credit cards are infamously high.
According to Credit.com, reducing or eliminating credit card debt is one of the most effective strategies to enhance your credit score, aside from avoiding interest costs.
Once you’ve paid off your credit cards, you can turn your attention to other types of unsecured debt, such as medical bills.
Begin by paying off college loans, personal loans, and any other unsecured bills you may be owing.
Use the debt snowball approach to pay off your obligations in order of decreasing size: start with the smallest bill and work your way up to the next smallest, and so on until you have paid off all of your unsecured loans in full.
Because of the higher risk of default associated with these debts, they have a higher interest rate than secured debts such as vehicle loans and mortgages.
You must free yourself from under their burden in order to begin investing and building real wealth.
Art is a good investment.
Art is one of the oldest and most exclusive asset classes, but the vast majority of the 99% have never even heard of it, let alone considered it.
Some collectors are so affluent that they will go out of their way to pay teams of experts to help them acquire art for their collections, and some are worth more than a billion dollars.
Some of these artworks have achieved incredible multiples in terms of return, but if you’re like most people, you’ve never had the opportunity to see them in person.
These days, clever investors can make a sideways investment in art by purchasing shares in art galleries. There are companies that purchase fine art and then sell shares in the company that reflect a portion of the pieces purchased. And you, as an investor, have the opportunity to benefit from its growth!
Improve Your Professional Qualifications
We live and work in a knowledge- and skills-based economic environment. Better skill levels translate into higher pay scales.
That suggests that success necessitates an investment in oneself, such as the acquisition of new professional certificates, licenses, or degrees.
Plan out exactly where you want your career to go, so that you can then map out exactly how you will achieve your goals.
If you receive a tax refund, it may be able to assist you in covering the initial expenses, allowing you to negotiate a higher pay or qualify for a new position.
Invest in your profession, whether you want to earn more money in the future or simply want to change careers to something more meaningful.
Contribute it to the down payment for your first home.
While there is nothing wrong with renting — it does, after all, provide greater freedom – homeownership comes with a number of financial advantages that renters do not have.
For starters, housing values and rentals in the United States have increased at a much quicker rate than earnings.
The Clever Real Estate 2020 study found that rents increased by 72% between 1960 and 2017, and housing prices increased by a whopping 121% between 1960 and 2017.
Meanwhile, actual incomes increased by only 29% over the same period. All of those values are expressed in dollars that have been adjusted for inflation.
Furthermore, buying a home provides protection against inflation because the monthly payment remains fixed even as the value of the dollar declines over the next 15-30 years—a period during which you can expect rents to continue their upward trend.
Furthermore, many homeowners are eligible to claim a mortgage interest deduction and have the ability to make changes to their properties as they see fit.
Homebuyers might also use their imaginations and house hack their way into a new home.
In the classic house hacking model, homeowners purchase a multifamily property with two to four apartments, live in one of them, and rent out the remaining ones (s). As a result, they are effectively living rent-free because their rental income covers their mortgage payment. However, this is not the only method of house hacking.
Add an Income Suite to your business.
Ingenious homeowners can house hack a single-family home by building an income suite on the property they rent out to a renter as an additional source of income.
An independent additional living unit, a basement or garage apartment, or any other area of your home with its own entrance, bathroom, and kitchen or kitchenette are examples of what you could have.
Even if your rent does not cover the entirety of your mortgage payment, you can still eliminate a significant portion of it.
You don’t enjoy the thought of having a long-term tenant. On Airbnb, you may rent out your apartment, or simply a single bedroom, for a short period of time.
Occasionally, a friend of mine would rent out a bedroom and attached bathroom in her apartment for a weekend or two each month, usually for a little fee. She was able to meet the majority of her rent payment with the money she made.
Make a down payment on a rental property with the money you’ve saved.
No one is stating that you must rent out your own property in order to make rental revenue. Why not set up a passive income stream that will continue to pay out indefinitely and reap the benefits?
In addition to providing continual income, rental homes provide a plethora of other advantages. As long as your mortgage payment remains constant, even as rentals rise, your income is inflation-adjusted.
The fact that they include numerous above-the-line tax deductions means that tenants can continue to claim the standard deduction on their personal tax returns, which is beneficial to landlords.
The best part is that investors can purchase these income-producing assets mostly using the money of other people.
When taking out a rental property loan, investors are normally required to put down a 20% deposit. The remainder is covered by the lender.
Your tenants may be able to help you pay down your mortgage. And when they do, your monthly cash flow will soar to unprecedented heights.
Learn How to make money Flipping a Houses
Purchasers might make a quick profit by flipping an investment property rather than retaining it as a rental.
By now, everyone is familiar with the process of flipping. Investors purchase a dilapidated property, rehabilitate it in order to generate equity, and then sell it to a homebuyer.
While flipping houses can be lucrative, there are hazards and pitfalls to be aware of that are not depicted on television.
Take care not to underestimate the price of renovation or the costs of maintenance.
Contractors are notoriously tough to work with, frequently surprising owners with unexpected changes in costs or schedules in the middle of a project’s duration.
Please keep a careful eye on contractors and provide them with incentives to complete jobs on time and on budget as soon as possible. And if you aren’t quite ready to start flipping houses, consider starting with the merchandise.
Budget for a contingency fund to meet unforeseen expenses. As a first-time real estate investor, you’ll have far more opportunities than you can handle.
Consider putting money into tax-sheltered retirement accounts.
Everyone in the United States who earns less than a specific income level can contribute to an IRA or a Roth IRA. Employer-sponsored retirement plans, such as 401(k)s, 403(b)s, and SIMPLE IRAs, allow employees to make additional contributions.
If your employer is willing to match your contributions, take advantage of the opportunity.
Aside from the tax advantages, when your employer matches your investment dollar for dollar, you receive an immediate 100% return on your investment. It’s essentially free money, to put it another way.
Beyond that, you might want to think about opening a Roth IRA. It offers greater flexibility than a regular IRA, allowing account holders to withdraw contributions at any time without incurring tax consequences.
Furthermore, many Americans should anticipate paying higher taxes in retirement than they do now, making Roth IRAs an excellent strategy to hedge against both future tax increases and higher taxes due to their own increasing wealth.
Employees can also contribute to a Roth version of their 401(k) or 403(b) plan, if they so choose. You might also think about setting up a Gold IRA to invest in precious metals.
Invest in Education Savings Accounts (ESAs) that are tax-deductible.
Many parents desire to assist their children with the expenditures of their college education after they have retired.
Fortunately, there are various forms of tax-sheltered accounts that they can use to accomplish this.
Consider opening an education savings account (ESA), which is regulated at the federal level, as a beginning point. As a result, the rules are easy for all citizens of the United States.
This type of account operates similarly to a Roth IRA in that contributions are taxable, but the money grows tax-free, and you pay no taxes on withdrawals (when used for education expenses).
Parents can make annual contributions of up to $2,000 per child.
Parents can also make contributions to a 529 plan as an alternative. These are governed at the state level, therefore the laws and benefits differ from one state to the next.
It is important to note that 529 plans are available in two basic forms: investment accounts (which are similar to ESAs and Roth IRAs) and prepaid tuition plans (which are similar to 529 plans).
In the latter case, parents pay a lump sum of tuition money up-front, years before their child is eligible to attend college. The child can then continue his or her education without having to pay any more tuition.
Invest in a brokerage account that is taxable.
Even if it is desirable to reduce your tax liability, this is not the primary purpose of investing. Investing your money allows you to accumulate wealth and passive income streams, which in turn allows you to fulfil your long-term objectives.
Furthermore, in the majority of cases, investors can only take money from their retirement funds after reaching the age of 59 and ½ in many instances..So, What happens to those people who wish to retire in their 40s and are still working?
In addition to their tax-sheltered accounts, everyone should have a taxable brokerage account to trade stocks and bonds.
These accounts allow you to invest in blue-chip stocks, bonds, and other assets, with the majority of them being completely free.
In many cases, brokerage firms are no longer required to charge commissions on trades; check out Schwab or TD Ameritrade for commission-free investing.
Investors are also not required to design their holdings. Provide use of a free Robo-advisor to make financial recommendations and to manage your investments automatically. I use Schwab, but SoFi Invest also has a good free Robo-advisor service that is worth checking out.
Invest in order to generate passive income
Rental properties aren’t the only source of passive income; there are other options as well. Investors can also generate income streams from investments such as stocks, bonds, real estate investment trusts (REITs), and other less popular options.
Dividend-paying stocks, mutual funds, and exchange-traded funds are some of the ways in which investors can earn passive income from equities (ETFs).
Find mutual funds and individual stocks that pay out high dividend yields, such as the NOBL dividend aristocrats fund, that payout dividends regularly.
In the event that diversification and growth are more important to you, consider investing in stock index funds, which track key stock indices such as the S&P 500 index.
Bonds are a good option for those with reduced risk tolerance. Investigate municipal bonds with tax advantages if you want to lower your income taxes while also increasing your effective returns.
Real estate investment trusts (REITs) and real estate investment trust exchange-traded funds (REIT ETFs) allow you to invest in real estate from the comfort of your brokerage account, avoiding those irritating late night 10 p.m. phone calls from renters screaming about burnt-out light bulbs, for example.
According to SEC regulations, publicly-traded REITs are required to distribute 90% of their income to shareholders in the form of dividends.
As a result, these funds generate high dividend yields but have limited growth potential because they lack the freedom to reinvest their gains in additional properties.
Place your money into real estate crowdfunding platforms.
Non-accredited (non-wealthy) investors have been able to participate in real estate crowdfunding investments at an increasing rate during the last decade.
In some circumstances, they provide private real estate investment trusts (REITs), which are funds that either own properties or lend money against them.
Investing in real estate loans can be as selective as the investor wants it to be in some cases.
However, in both circumstances, investors may normally expect to earn high rates of return on their investments.
This type of private investment does not trade on stock markets, in contrast, to publicly traded real estate investment trusts. Investors, on the other hand, purchase directly from the crowdfunding platform itself.
I’ve had mostly nice experiences with Streetwise, Fundraise, and GroundFloor, though it’s important to do your research to ensure that they’re a suitable fit for you.
Do not put money into a real estate crowdfunding investment if you may need it in the near future.
Many real estate crowdfunding projects need long-term commitments, frequently five years or longer.
Due to the fact that crowdfunded investments are not subject to the same SEC rules as publicly-traded REITs, crowdfunding platforms can reinvest a greater portion of their money into building their portfolios rather than paying out 90% of their profits in dividends to shareholders.
Start a business or expand an existing one.
The world’s wealthiest people are not doctors or attorneys, but rather business owners and financiers. They are business owners who have established their own enterprises.
It may be worthwhile to consider using your tax refund to start or expand your own side hustle business.
Make no apprehensions about starting small, whether it’s through freelance employment or the beginning of a blog or web-based business.
Such businesses require nothing in the way of initial cash, and you may begin working for them on the side while still maintaining your full-time employment.
You might consider reinvesting your tax refund towards the growth of your existing business if you currently have one.
Experiment with different marketing methods. Hire virtual assistants to handle low-skill jobs, allowing you to devote more time to high-level work that only you are capable of performing. Introductory entry into a new product market or geographic region
Who knows what will happen? The possibility exists that your side gig business will grow into a full-time job sooner than you anticipate.
Health Insurance Plans Should Be Modified
If you are dissatisfied with your current health insurance plan, there is no better time to make a change.
For example, a more comprehensive policy with higher premiums and lower deductibles could be the result. For some families with rudimentary health insurance, an update might go a long way toward shielding them from costly health emergencies in the future.
A lower-cost, high-deductible healthcare plan combined with a health savings account, on the other hand, maybe preferable for certain healthy households (HSA).
After all, health savings accounts (HSAs) have the most favourable tax treatment of any tax-sheltered account.
In addition, they give you greater control over your healthcare spending and expenses. This is true, but only if you make sufficient contributions to your HSA each year, rather than using your savings to pay for the premium.
Individuals can make a maximum contribution of $3,550, and families can make a maximum contribution of $7,100 for the tax year 2020. (Those figures will increase to $3,600 and $7,200, respectively, for the tax year 2021).
Whatever your definition of a “better” healthcare plan is, your tax refund may be able to assist you in switching to a plan that better meets your needs.
Purchase term life insurance or long-term disability insurance if you have a family.
Life insurance and long-term disability insurance are not required for everyone. Traditional “breadwinner” homes, on the other hand, frequently do.
Families who rely primarily on a single source of income benefit the most from life insurance. If that one breadwinner dies, the surviving family will be unable to afford their living expenditures since they would have little income.
Long-term disability insurance follows the same rules as short-term disability insurance.
Although they continue to live, the breadwinner may experience a medical crisis that stops them from working and earning money. However, the outcome is the same for the family: a reduction in income.
Before determining whether or not to get life insurance and/or long-term disability insurance, consider your family’s reliance on a single source of income for survival.
Make a Will and an Estate Plan.
Every adult should have a will and an estate plan. Furthermore, the greater your assets or the number of dependents, the higher the urgency with which you require one.
People who die intestate, or without a will or estate plan, burden their relatives with a complex legal problem when they pass away, according to the law.
This is hardly the type of legacy that most of us would like to leave behind. Minor children, in particular, require the smoothest transition possible following the death of their parents..
The majority of people will not have to spend a lot of money on their estate plans.
Create a last will and testament online through a respected online legal services company to get started. If you die unexpectedly, it will cost you little money and leave your family in significantly better situation than if you died sooner.
Higher-net-worth individuals should consult with an estate planning counsel because their estates tend to be more complex. Middle-class Americans, on the other hand, can begin with internet legal services for their will.
Make a plan to safeguard your assets.
Only those with a high net worth are required to devote a significant amount of time and resources on asset protection. However, anyone can be sued at any moment and for any reason. As a result, those who stand to lose the most must devise strategies to defend themselves.
Generally speaking, you should start modest with asset protection and only add additional complexity as you progress from “successful” to “rich,” rather than starting large and adding complexity all at once.
If your net worth has beyond the seven-figure mark, you should consult with an asset protection attorney. He or she can guide you through various choices such as irrevocable trusts, foreign legal companies, and other options that provide anonymity as well as financial security.
Before you spend tens of thousands of dollars on ridiculous legal strategies, get a second opinion. However, for wealthy Americans, a little foresight and precaution today can save hundreds of thousands of dollars tomorrow.
Pay off your secured debts as soon as possible.
Compared to unsecured loans, loans secured by collateral, such as a car loan or a home mortgage, have lower interest rates, making them a lower priority to pay off than your higher-interest unsecured debts.
Nonetheless, paying off these secured debts provides a guaranteed return on investment in the form of avoiding future interest payments on the debt.
Make a down payment on your auto loan if you don’t know what else to do with your tax refund and want a low-risk strategy to “invest” your money.
Home mortgages have interest rates that are considerably lower than those of auto loans. As a result, they are even lower on the list of priorities for reward.
People who are retired or on the verge of retiring have a lower risk tolerance than younger adults. Rather than attempting to earn a 7-10% return on their investment in the stock market, individuals may be content to accept a guaranteed 3-5% return by paying off their mortgage in full sooner rather than later.
Lower living expenditures translate into less passive income required for retirement, which implies that paying off your mortgage early can assist you in reaching your retirement goals.
Move to a lower cost-of-living area
According to Zillow, the median home price in San Francisco is $1,425,867. San Francisco has a population of 1.3 million people. Compared to that, the median home in Cleveland costs less than 1/17th of that amount, or $84,157.
This provision does not address income, property or sales taxation, among other things. Alternatively, the price of local services and goods.
In any case, no one is requiring you to remain in the United States.
My family and I have relocated to a country where our living expenses are significantly cheaper than they were in the United States.
Keeping a full-time babysitter costs approximately $500 per month, whereas an upmarket restaurant dinner for two costs approximately $25. Because of my wife’s job as a schoolteacher, we are able to maintain a reasonable standard of living while saving and investing 100% of our income.
Yes, there is a fee associated with shifting up-front. However, by paying for that initial expense with your tax refund, you will be able to reap the benefits of decreased living expenses for many years to come. And it implies not only better value for your money, but also the ability to save and invest more money, allowing you to accumulate wealth much more quickly.
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