How to Spend Your 2020 Tax Return Money in 2021
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Congrats, you got a tax return! This video is really relevant for anybody who has started filing their taxes and is getting a big refund. Bonus season is also upon us. People are getting their awesome, stellar performance reviews and bonuses are rolling in. So if you have this extra windfall of money and need some ideas for what to do with it, this article is for you.
1. Pay off debt
I'm going to put this one first and foremost—if you have a high interest debt above 7%, so things like credit card debt or student loans, one of the best things you can do for yourself to really help you achieve all of your wildest dreams in life is to get rid of that debt as soon as possible. The interest that you're paying on the debts is detracting from any potential wealth growth that you could achieve. It’s generally not a good idea to invest money when you have an interest eating away at your money.
Stock market returns usually yield about 10%, minus inflation which is around 3%. So that's really about a 7% of return that you can expect on average for the stock markets. Sometimes it's way more, sometimes the market is down, and you do lose some money. Because of that, it's important to get rid of debt. If you have the debt to just toss in your bonus money and really just get rid of it as soon as you can. Then you will be on your way to gaining and building wealth for yourself.
2. Contribute to your Roth IRA
Another idea for your windfall tax return or bonus is to max out your Roth IRA account. If you have not done that already for last year, you still have until the tax filing deadline of April 15th, 2021 to max out your Roth IRA account.
If you were making over $139,000 you'll have to do a backdoor Roth conversion, which just means putting your contribution money ($6,000 is the max) to a traditional IRA and filing a form to convert it to a Roth IRA. This helps you get around the income limits. $139,000 is the income limit for single filers. Below is the income chart limit from Investopedia.com, so you have a reference of what your income limit has to be under to contribute directly to a Roth IRA.
Source: https://www.investopedia.com/retirement/ira-contribution-limits/
If you are under these limits, then you can go ahead and contribute directly to a Roth IRA. You still have time right now to contribute to your IRA for the year 2020 until April 15th.
3. Spend it (intentionally!)
Assuming you don't have any debt and you maxed out your retirement account, it is okay to treat yourself! I'm not saying, just get whatever you want, but what is something you have been working hard towards? It's been on your list for months at this point, and it is something you will use daily. Whether it be that Chloe purse on the Real Real that you've been eyeing that you are going to use as your new daily purse, of course, spend the money! As long as it’s on something that you think you will get a lot of use out of. Spend that money on a big ticket item that you really need and will add value to your life.
4. Contribute to a savings fund
Another great idea is putting that money into a travel savings fund or a savings fund for something you are working towards that's a big ticket item. Maybe you won't have all the money for it with your tax return, but I think it's important to start building savings funds.
I personally use Ally bank. You can put it in buckets. So I have my emergency fund bucket and then I have a travel bucket I'm actually currently working on building that back up since I dumped, I stole from it to max out my Roth IRA for 2021. And front-load it. And do a lump contribution because why not?
I haven't been traveling and I don't really see myself traveling in the immediate future, but I'm going to be cautiously optimistic about travelling this year. I still have time to replenish my funds. Putting your tax return aside into a travel fund will set you up to do a nice trip. I think experiences are something worth paying for.
5. Donate
Donating your money is a really good thing to do with your tax return that will honestly help your taxes for the following year. You can actually donate to a qualified charity of your choice and have that be deducted from your gross income. You just need to keep the receipt and file for it.
You can actually write off $300 without filing any form or anything. Say you donated $300 to a charity in good faith. The government will take that off of your taxable income. If you donate above that, you can put as much qualified donations towards a tax write off. You just need to be sure to save the receipts and your taxable income will be reduced.
That is really great. And honestly, yeah, like if that money you didn't notice it was gone anyway, you might as well pay it forward and also help yourself out in the future on your taxes.
6. Invest in yourself
Something I think is always worth spending money on is an investment in your mind and yourself. If you have been eyeing a course to learn a new skill set, to either enhance the one you already have now might be the time to spend on that.
Maybe you want to switch careers or take a coding course online, read a book. I think educational materials to help you learn something new is always something worth spending money on. Potentially those things could even help you earn more money.
If you've been eyeing a course on how to do something—maybe how to get better at making YouTube videos—and you have this money to invest in yourself, I think you and your brain are the best thing you can spend on.
7. Invest in the stock market
Finally there's always the option to invest your tax refund. That's probably what I will do if I get a refund. I'm actually probably going to owe money this year because I did a lot of freelancing and 1099 work that I haven’t paid taxes on yet.
Good, old, boring index fund investing is how I invest. If I get a refund, I’d dump all my money into a total stock market index fund and have my money keep working for me as hard as it can. And that is by being invested.
Those are my 7 suggestions for what to do with that extra cash! Have you gotten a tax refund or a bonus this year? Let me know what you spend it on or what you're planning on spending it on. I'm always so curious what people end up doing with this money.
Be sure to drop that in the comments below and subscribe to my channel if you haven’t already so we can spread the FI/RE. Let's retire early together!
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