How To Invest Your Tax Refund and Other Financial Windfalls Wisely This Year
When used wisely, unexpected windfalls can be a great boost to your overall financial plan. Financial windfalls are by definition extra sources of cash that you weren't planning on receiving, so if you save and invest them rather than simply spending them, you can put yourself in a much better financial position.
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While you shouldn't deny yourself the enjoyment of spending a small portion of your windfall, tucking away the rest is a sound financial move. Here are some of the best ways to invest your tax refund and other financial windfalls wisely this year.
Beef Up Your Retirement Accounts
Tax-advantaged retirement accounts like IRAs and 401(k) plans are great ways to build up a nest egg. If you're having trouble maxing out your contributions, a financial windfall can be a perfect solution. Not only will it give you a head start toward your retirement goal, but it will likely multiply itself many times over by the time you're ready to withdraw it. If you add it to your 401(k) plan, your employer may even match it, making it twice as valuable right off the bat.
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Pad Your Emergency Fund
It's understandable that you might not want to "lock up" your financial windfall for 20 years or more in a retirement account. However, this doesn't mean you should just blow through it. Another great use of a financial windfall is to pad your emergency fund. While many financial analysts suggest you should have at least three to six months of savings in an emergency fund, the truth is that many Americans fall short. Some reports indicate that more about 40% of Americans couldn't come up with even $400 for an emergency. If you find yourself in this category, your emergency fund would be a great home for your financial windfall.
Open an HSA
A health savings account is a triple-tax-free way to save for health-related expenses. You'll get a tax deduction on the amount you contribute, your earnings will grow tax-free and your withdrawals are also tax-exempt when used for qualifying health-related purposes. If you can keep the account until you're 65, however, that restriction goes away, allowing you to withdraw funds for any expense whatsoever without paying a penalty. This makes an HSA a great place to put a financial windfall.
Start a Business
All companies need capital to both start and continue operations. If you've had a great business idea swirling around in your head but haven't been able to fund it, a financial windfall may be just what you need to fulfill your dreams. Just be sure to have a business plan in place first so that you don't squander your windfall and find that you're still coming up short in terms of financing.
Take Some Classes
Investing in yourself can be one of the best steps you ever take toward lifelong financial freedom. Taking classes toward a degree or a credential can help you get a better job or elevate your standing in your chosen field. The cost of additional education can pay for itself many times over in the form of increased lifelong earnings.
Invest in Real Estate
Real estate is one of the best ways to build wealth over the long term. Depending on the size of your financial windfall, you may be able to use it as the down payment on a primary residence or a rental property. This can be a huge help because the truth is that while many Americans can afford the monthly mortgage payments on a property, saving enough money for a down payment is another matter entirely. Owning a primary residence can free you from monthly rent while you build equity in your home, while owning a rental property can provide you with monthly checks for as long as you can keep the property occupied.
Step Up Your Side Hustle
Sometimes, a side hustle is something you need to do just to get by. If you have a bit of financial backing, through a tax refund or some other lump sum of cash, you may be able to transform your side gig into a legitimate side business. For example, if you're an artist or some other type of tradesperson, you might be able to invest in better equipment to create higher-quality products, or you might even be able to hire an employee to ramp up your output and generate additional revenue.
Pay Off Your Credit Card Debt
Perhaps the best use of a financial windfall is to pay off any outstanding credit card debt you may have. Most credit cards charge interest of 15%, 20% or even more, meaning even a small amount of debt can rapidly grow out of control. Making monthly payments, even minimum payments, can be a huge drain on your cash flow, so using a financial windfall to get out of debt is an excellent strategic move.
Upgrade Your Home
A financial windfall might be just what you need to catch up with maintenance projects in your home. Nearly every home could use some touch-up work or even some upgrades, such as better lighting, newer pipes, or more modern furnishings. Taking care of these maintenance and upgrade projects could not only make your home safer and more comfortable, it could also increase its value.
Donate It
If you've got all your financial bases covered, donating your windfall can both feel good emotionally and give you a tax deduction to boot. If your retirement accounts are fully funded, you've got plenty of insurance in place, you're completely out of debt and you've got a solid emergency fund, helping a person or institution less fortunate than you can be the ultimate way to use a financial windfall.
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This article originally appeared on GOBankingRates.com: How To Invest Your Tax Refund and Other Financial Windfalls Wisely This Year
