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March 11, 2020

Where Your Tax Refund Comes From and Why You Should Not Waste It

Many people look upon their tax refund as a gift from the government, and that it is nothing more than free money, which gives them the impression that they can spend it in any manner that comes to mind. But when you understand the true nature of your tax refund, you will realize that this is anything but true and that it is way too valuable to waste.

In this article, we will explain where your tax refund actually comes from and how you can spend it on things that will improve your life.

Where Exactly Does Your Tax Refund Come From?

If you are like most taxpayers, you can trace the origin of your tax refund to when you started at your present job. Your employer likely asked you to fill out a W-4 form from the IRS. This form asked you a number of questions, such as your marital status and the number of dependents that you have. From this information, and from the amount of salary that you are earning, the IRS estimates how much money in taxes you will have to pay in any given year and has your employer withhold this money from your paycheck. These withholdings are among the deductions that you surely must notice on your paycheck stub.

The problem is that the IRS (and your local tax authorities, if applicable) usually overestimate the amount of taxes that you owe. This is why around 75% of all tax returns result in a tax refund, which the IRS (and your local tax authorities) are required to give you once you have filed your tax returns.

So, instead of looking at your tax refund as some kind of gift from the government, you should look at it for what it really is: money that you have earned through your hard work. It is, in essence, a very delayed paycheck, and you should value it just as you value any of your other paychecks.

What You Should Do with Your Tax Refund

Now that you understand the nature of your tax refund and just how valuable it is, what should you do with it?

There are many good answers to this question, and each of them will improve your life a lot more than some frivolous purchase, which will give you nothing more than some momentary satisfaction. The great thing about these ideas is that none of them are mutually exclusive. You can use any combination of them that you would like, including all of them.

Here are some of the best:

Save It

There are lots of reasons why you should save part of your tax refund.

The first of these is to protect you against emergencies. You never know when an unexpected event will come, such as a large medical bill, the loss of a job or some other emergency. By laying some money aside for emergencies, you will be better prepared to weather them.

It is also important to save for your retirement. Experts say that, to retire comfortably, you will need an amount of money that is 25 times more than what you normally spend in a year. While your tax return alone is not going to get you there, it is a good step toward it.

You may also want to save money from your tax refund for something special in the future, like for your children’s college education or for that exotic trip that you have always wanted to take.

Pay Off Debts

If you are like almost everyone, you have debts. This can include a mortgage, credit cards and consumer and student loans. These debts affect not only your monthly expenses but also how much you can borrow. So, consider using part of your tax refund to pay off these debts, which will improve both your short-term and long-term financial health.

Invest It

One of the best uses of your tax refund is to invest it into something that will earn you more money in the future. There are many ways that you can invest money, such as in a high-yield savings account or in stocks and bonds. You can even invest it in yourself, by putting some money toward the development of your career. But one of the smartest investments that you can make is in real estate.

In recent years, there has been much talk about the top 1% of earners and how they differ from the other 99%. One of the biggest differences is in how they invest money. While the bottom 99% of earners invest 70% of their money in stocks and 30% in bonds, the top 1% invests 30% of their money in real estate.

There is actually a good reason for this disparity. Traditionally, only wealthy people have had the money necessary to invest in real estate. But this is no longer the case. With a real estate investment trust (REIT), anyone can invest in real estate just as easily and as cheaply as they can invest in stocks.

If you are looking for a good place to invest part of your tax refund, consider DiversyFund’s Growth REIT. For as little as $500, you can buy into an SEC-regulated REIT that has no management fees and has so far produced a 17.6% rate of return. For comparison purposes, over the last 20 years, the S&P 500 has had an average return of 5.6%.

One of the best reasons for investing in Growth REIT is that, because of its high returns, it can help you reach your other financial goals. At the end of its investment term, it can provide you with money that you can use for emergencies, retirement and special purchases. You can also use the money to pay off your debts.

In conclusion, just because you can spend your tax refund on something frivolous, does not mean that you should. Instead, spend this money, which you worked so hard to earn, on something a lot more important: your future.