4 Ways To Invest Your Tax Refund

By | August 25, 2021

Got a big tax refund? Here’s how you can use it to grow your wealth and multiply your income.

4 Ways To Invest Your Tax Refund

We all dread that time of the year when we have to file our Income Tax returns. All those calculations and figuring out which section of the Income Tax Act to claim refunds under can get pretty complicated, we admit. But think of the time when you get a sudden windfall as a sizeable tax refund. All that effort that went into poring over pages of fine print doesn’t seem so useless after all, isn’t it? So instead of going on an impulsive shopping spree and splurging all the money that you’ve got as a refund, how can you use that to grow your wealth or multiply your income? We’ll tell you all about it here.

Before we delve into the options that are available to you to utilize your tax refund and channel it into diverse income streams, one thing you need to understand is that as much as it may seem like it, a tax refund is not free money. It’s hard-earned money so you will need to be cautious about what you choose to do with it. Now let’s take a look at ways you can use this windfall to improve your finances:

  1. Create an emergency Savings Account:

So why do you need to create an additional Savings Account when you already have one, you ask? Well, you may have an existing Savings Account but if you’re also betting on it as your emergency corpus, then you’re setting yourself up for a major financial setback. A separate Savings Account, especially one that gives you a high rate of interest, will help you tackle unanticipated financial emergencies. This will ensure that when you’re faced with a potential financial emergency, you don’t derail your budget or deplete your savings. To check yourself from dipping into this Savings Account to meet your regular expenses, you can also ensure that the emergency Savings Account that you’re opening comes with minimum transaction privileges.

Additional Reading: Simple Ways To Save Money

  1. Pay off high-interest debt:

If you’ve racked up a Credit Card bill that’s ruining your sleep, use this tax refund to pay off your debt. Credit Cards come with high-interest and if you’ve not been paying your dues in full, the balance is only going to add up and with interest getting added, your debt burden will increase considerably. Use this tax refund to pay off high-interest debt like that accruing from your Credit Cards. Financial experts recommend two simple methods that you can peruse to pay off high-interest debt:

  1. Avalanche method: Pay off high-interest bearing debt first. Once that’s out of the way, focus on the balance with the next high-interest. This way you can go on saving money.
  2. Snowball method: Pay off the lowest balance first. This will give you a sense of accomplishment and motivate you to work your way up to pay off the higher-interest balances one after the other.

Additional Reading: 5 Tips On How To Get Out Of A Debt Trap

  1. Open a Fixed Deposit:

If you already have an emergency fund or don’t have a high-interest debt to pay off, consider putting your tax refund toward a long-term savings goal by opening a Fixed Deposit. A Fixed Deposit is a savings scheme where you deposit a principal amount for a pre-determined period of time. Once the Fixed Deposit attains maturity, you get to enjoy the principal amount along with the interest earned on it over the period of time. Since returns on Fixed Deposits are not linked to market highs and lows, the risk involved in your investment is minimal and you will get guaranteed returns from them.

Additional Reading: Answering All FAQs On Fixed Deposits

  1. Invest in a long-term goal:

Don’t have any debts to pay off or already have an emergency fund? You can consider putting that money into a high-yielding Savings Account and utilise it for a down payment on your dream home, a wedding or a vacation. Even if your goals shift as you age, this lump sum in your account will help you adapt to your priorities. If you want to make sure that money earmarked for one goal doesn’t get used for another one, you can split this money and put it into different high-yielding Savings Accounts and take it out when you need it.

If you’re not too keen on putting this money into any of the options mentioned above, feel free to invest in Mutual Funds with it or work out an investment plan that will reduce your tax liability and thereby the quantum of the tax refund. Remember that a tax refund is not free money so use it wisely. Need help with investment options? We can help!

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