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Retirement

Use Your Tax Refund to Retire Early (Hint: Invest, Invest, Invest) 

How to Use Your Tax Refund to Retire Early

If you thought early retirement would never be possible for you, you should think again. There are numerous ways you can save more money every year and retire long before you reach 65. For example, you could start using your tax refund to help you retire early!

Adjust Priorities to Retire Early

Once your priorities are clear, every financial decision you make should bring you closer to your goal of early retirement. In order to maximize your savings plan, you need to ensure you are living below your means. If you already do this, then you may consider even more of a minimalistic lifestyle to ramp up your savings. This means downsizing, cutting out unnecessary expenses, and foregoing expensive indulgences. Instead of using the money to splurge, you should use any additional income and tax refund to help you retire early.

In addition to controlling your spending, you should also look into way to generate more supplemental and passive income. Investing is the perfect way to achieve this. If you are new to the game, there are several online resources and advisors out there. And remember, it is never too late to start investing and working towards your financial goals.

Using Your Tax Refund to Plan for the Future

With an average refund is about $2,700 this year, you have a significant amount of money to begin investing. However, you should view your tax refund as just the stepping stone. It will take a great deal of self-discipline and complete lifestyle changes to get you to early retirement. Furthermore, the sooner you plan to retire, the more proactive you will have you be.

First and foremost, you need to have a solid savings plan. Every cent must be accounted for, and any extra money should be put toward investing. Supplemental income and salary increases help, but you need to invest in appreciating assets. Over time, assets you accumulate by investing in the stock market, real estate, or your own business increase your personal net worth more than traditional savings accounts ever could.

And, of course, let’s not forget about compounding interest. When it comes to your nest egg, compounding interest creates exponential growth to help you build your retirement accounts more quickly. You should always discuss your strategies with your financial advisor, but here are a few ways you could use your tax refund to help you retire early.

7 Ways to Invest Your Tax Refund to Help You Retire Early

1. Max Out Retirement Accounts

The first and most logical place to park your money is your retirement accounts. You could use your tax refund to max out your employer-sponsored 401Ks, individual, and Roth IRAs. If you are married, you can also set up accounts in your partner’s name as well. This doubles your investments so your retirement accounts earn greater compounded returns over many years. Best of all, it helps you retain more of the principle since you can make tax-free withdrawals after you reach retirement age.

2. Fund Taxable Accounts

If you have a large lump sum, you could meet with a financial advisor and open a brokerage account to start investing. Stocks and mutual funds traditionally offer better returns than high-yield savings accounts and bonds. However, you need to remember there are always risks involved. Before you start stock picking or throwing money at the latest market trends, sit down with a professional and develop an investment strategy that aligns with your goals and risk tolerance. Diversify your portfolio and use online screeners to help you choose the best investment vehicle for you.

3. Invest in Your Health

Another idea to add financial security to your retirement plan is to fill the gaps in your health care coverage. Medical expenses account for a huge portion of spending during your retirement years. A Health Savings Account (HSA) could save you a ton in medical costs. Moreover, it saves you a bundle in taxes. Not only are paycheck deductions and withdrawals for medical expenses tax-free, but personal contributions are tax-deductible as well.

4. Invest in Your Home

You could also consider using your tax refund to invest in your home. Finally taking care of overdue maintenance projects, upgrades, and renovations improves both the value and quality of your home. In addition to increasing equity, putting the money into spaces you use the most will make you feel happier in your own home.

Buying additional insurance is another way to safeguard you home into your retirement years. Umbrella liability policies far exceed standard homeowner’s insurance and better protect your assets.

5. Invest in Yourself

One investment opportunity people often overlook is investing in themselves. If you are looking for a career change or want to learn a new skill, use your tax refund to invest in yourself. Your check could help you to take a class or cover tuition costs if you want to go back to school.

6. Invest in the Next Generation

If you have already seen to your own financial needs, you could use your tax refund to set up education accounts for your kids. Besides helping them avoid crushing student loans, you are also relieving some of the financial stress for yourself later on. Education is expensive and the costs are continuing to rise. Establishing dedicated education funds from an early age will allow you greater financial freedom down the line.

7. Invest Globally

Finally, you could use your tax refund to invest in international markets or global ventures. It seems counterintuitive as production slows and unemployment soars worldwide. But, you must remember that time balances economies. Look at international stocks and funds which are dipping under current market conditions. Depending how you invest, you have a rare investment opportunity with huge growth potential.

Reaching Your Retirement Goals

You must change your outlook and focus on your financial goal if you plan to early retirement. It requires a huge commitment and lifelong dedication. Not only must change how you view money and control your spending, but also work diligently to reach your retirement goals.

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