If you don’t have a plan for your tax refund money, your tax refund money will be gone (on a bunch of stuff you probably don’t even really need). That’s why I want to share 5 smart things you can do with your tax refund, including some simple ways to invest that money so you can start earning dividends and cash in your sleep.
And definitely stay tuned for the last tip, which is pretty unconventional, but I did this with my tax refund and it totally changed my life.
So watch the video below or keep on reading!
#1 – Invest it in a money market fund
The money market is a place to park your cash short-term and earn a decent yield of 2-3%. When you invest in the money market, you’re lending your cash to short-term borrowers (meaning loans with maturities less than 1 year). So it’s a very safe place to keep cash because there’s hardly any interest rate risk, and generally very little credit risk.
I don’t know about you, but earning 2-3% on my money is WAY better than my savings account, which pays close to zero!
By the way, investing your tax refund into a money market fund would make a GREAT starter emergency fund, because if you ever need it, you can just get your cash out the next day, but meanwhile, the money isn’t just sitting there doing nothing.
So whether you want to build an emergency fund or you just want to park your cash somewhere until you decide what you really wanna do with it, consider putting it into a money market fund.
Although there’s different ways to invest in the money market, funds are the best way for individuals to access the money market because they’re low-cost and diversified, which maximizes your return while reducing your credit risk. Some popular low-cost funds you can look into to jumpstart your research are FDLXX or VMFXX (you can just Google them).
#2 – Invest in real estate crowdfunding for dividends
Your tax refund probably isn’t enough to buy an entire investment property, but it’s enough to get into real estate via one of those real estate crowdfunding platforms, like Fundrise. These platforms make real estate investments accessible to small investors by buying properties with funds that have been crowdsourced online.
What I like about Fundrise investments – and real estate investments in general – is that they offer a balance of dividends and growth. Since I’m young, I definitely want growth, and with the dividends I can either reinvest them right back into the fund, or just spend it on other things. The minimum investment is only $500, and the whole onboarding process is super easy.
It’s so easy (and more fun) to just blow your tax refund on a new handbag or on a vacation, but I’m trying to get you to think about ways to use your tax refund wisely, by investing it into things that will last and keep paying you dividends in the future for many years to come.
#3 – Buy stocks using the “Magic Formula”
Another way to invest your tax refund wisely for the future is by putting it into stocks. And I don’t mean just any stocks – I’m talking about buying stocks the SMART way.
I know financial advisors and personal finance gurus love to say “Buy low-cost index funds, diversify, and invest for the long-term”, but none of them address the fact that the stock market has been going up up up for more than 10 years. It’s made record highs and has been on the longest bull run in history. So I don’t know about you, but I’m not comfortable with buying stocks at the top of the market right now.
So what’s a girl to do?!
Luckily there’s a solution. It’s called Magic Formula investing, which is like diversification on steroids. Based on two simple financial metrics, it filters through all the thousands of companies you COULD invest in and shows you only the CHEAPEST and BEST ones. Between 1988 to 2004, this method outperformed the market by MORE than double! 30% compared to the market’s 12.3%.
The idea is that if you’re buying GOOD companies for CHEAP, then your risk is super low since there isn’t much more room for the stock to go down. Here’s the book – The Little Book that Still Beats the Market by Joel Greenblatt, and it explains this very simple yet powerful strategy in detail. It’s only ~150 pages long and readable in one day!
#4 – Pay off your smallest piece of debt
If you have some debt, whether it’s student loans, your car loan, or credit cards, one awesome thing you can do with your tax refund is to kickstart a massive debt payoff plan.
Debt is a huge mental burden and unconscious drain on your energy. It holds you back from embodying a true abundance mindset, because you’re always playing catch up and your cashflow is always going out the door vs into your savings and investments.
I recommend paying off your smallest piece of debt first. I know that the typical advice is to pay off the highest interest debt first, and there’s definitely a lot of financial logic to that. But you get a lot more satisfaction from wiping out a whole account, vs chipping away slowly on a bigger one. It feels like a much bigger “win”.
And because 90% of money is behavioral, it’s important to keep you motivated with easy wins along the journey. So if you have outstanding balances on multiple credit cards and student loan accounts here and there, use your tax refund to wipe some of them out (or at least to pay off a big chunk)!
#5 – Quit your job…!
That’s right… I said it! This is actually what I did several years ago when I got my tax refund. I was working on Wall Street and I really wasn’t happy with my job, but I didn’t know what I wanted to do next either. My job was so stressful and demanding that I didn’t even have the time, space, or energy to figure out what I wanted to do instead!
It was like being stuck in a hamster wheel. So right around April of 2015, I got a huge tax refund and I used this money – along with a bonus I got at work – as a savings cushion to quit my job.
I took the whole summer off, and I used that time to travel, read a ton of books, explore my hobbies, and it really helped me figure out what I was passionate about and what kind of life I really wanted to create. I tear up whenever I think about it, because I really don’t know where I would be if I hadn’t set aside the money to make that happen, because you guys – having the TIME and SPACE to think about your dreams and explore – is PRICELESS!
With just $5k, you can spend the entire summer in cheap places like Bali or Berlin and have a blast. That’s what I did in Bali – your room might be $500, scooter $200, food and other expenses $500, your flight $1000.
You can even have a job lined up after your time off, so this doesn’t have to be some crazy leap into the unknown. But if you haven’t been satisfied at your job, or you want to start working for yourself and need some free time to figure out how to do that, your tax refund might be the perfect chance to do it!
Alright now I want to hear from YOU.
What are YOU planning to do with this year’s tax refund?
Join me in the comments below and let’s motivate each other to make smarter decisions with our money!
That’s all for today, thanks so much for reading. If you liked this post, please share it with your friends so we can open up the conversation around money AND build a sisterhood of financially savvy, empowered women.
Always remember to go after your dreams unapologetically and to live life on YOUR terms. Cheers 😎