We need to talk. More specifically, we need to talk about one of the most common myths I see making its way around the personal finance world. That myth is:

“Renting is a waste of money.”

Multiple times per week I hear from people who want to buy a home because they’re worried they’re throwing away money by renting. Maybe they heard this from their parents, or maybe it was strangers on the internet.

But wherever they heard it, they make a major financial decision based on other people’s decisions rather than what’s actually best for their situation.

In this article, I want to clear up that misconception by showing you how renting is definitely not throwing away money.

Is Renting a Waste of Money?

Why people say that renting is a waste of money

Before I talk about why renting is definitely not throwing away money, let’s cover the reasons why people think this is the case. Because in the interest of full disclosure, there are some benefits of homeownership that have made it so popular.

1. Your mortgage payment builds equity in your home

Every month when you pay your mortgage, a portion of your payment goes toward your principal, meaning the amount you initially borrowed.

Your equity is the difference between your home’s value and the principal you still owe on your mortgage. And so as you pay down your principal, your equity in the home increases.

2. Homeowners benefit from rising home values

The real estate market may ebb and flow, but home values generally increase over time. As a result, many homeowners are able to sell their homes for more than they paid for them, resulting in a capital gain.

I’m not going to argue the validity of either of these statements. It’s absolutely true that paying your mortgage builds equity in your home and that your home’s value is likely to rise over the years. But in the next couple of sections, we’ll talk about why those things don’t matter as much as you might think.

The return on investment of homeownership

It’s true that home values have consistently increased over the years. Since 1940, home values have increased an average of 5.5% per year.

Depending on your investing experience, you might think 5.5% sounds pretty good. But what about when you compare it to other investments?

According to the Securities and Exchange Commission, the stock market sees an average annual return of about 10% per year. That’s nearly twice as much as the increase in value of a home.

So just how different are those percentages?

Let’s say you invested $100 per month for 30 years into an investment with a 5.5% annual return. After 30 years, you’d have more than $87,000.

But if you had invested that same $100 per month into an investment a 10% return? Because of compound interest, you’d end up with just shy of $200,000 — more than twice the return on a 5.5% investment.

It’s also important to note that the amount you pay for a house is far from the only investment you make into it. When you account for all the other expenses, it’s likely your returns from the increase in value are completely wiped out.

Let’s do the math: Renting vs. buying

It’s easy to think you’re throwing away money by renting because the money you pay each month doesn’t build equity in your home. But let’s look at an example that might change your mind.

Closing costs

Closing costs aren’t an ongoing expense of homeownership, but they make up a substantial cost in the first year. Closing costs run between 1% and 3% of the home’s purchase price. For a home priced at $335,000, your closing costs would be $3,350.

Interest

Let’s say you rent an apartment for $1,500 per month. You’re sick of throwing away money renting, so you buy that $335,000 home with the monthly mortgage payment of $1,500.

But that entire $1,500 doesn’t build equity in your home. In fact, in the early years of homeownership, most of your monthly payment goes toward interest. If you have an interest rate of 3.5%, then about $11,622 of your payment goes toward interest in the first year.

Note: I found these numbers using Bankrate’s mortgage amortization calculator for a mortgage of $335,000 and an interest rate of 3.5%.

Property taxes

Next, let’s talk about property taxes. Rates vary depending on where you live. But according to the U.S. Census Bureau, the average household spends about $2,471 on property taxes each year. We’ll use that for the purposes of this example.

Homeowners insurance

Another ongoing cost of homeownership is homeowners insurance. The cost will vary depending on where you live, the size of your home, how much coverage you want, and many more factors. According to ValuePenguin, the average cost of homeowners insurance is $1,445 per year.

Maintenance

Finally, let’s talk about home maintenance. As a homeowner, you’re responsible for any repairs that need to be done. There’s no more landlord to call.

Unfortunately, it’s impossible to predict how much you’ll spend on maintenance each year. However, experts recommend planning for about 1% of the cost of your home. On your $335,000 home, you could expect to spend $3,335.

Renting vs. buying: What’s the verdict?

People like to argue that renting is throwing away money. But as you can see, there are many expenses of homeownership that don’t build your equity in the home. Let’s compare how much money you throw away renting versus in your first year of homeownership.

As you can see, you “throw away” significantly more in your first year of homeownership than you would renting. And sure, closing costs are a one-time cost rather than an ongoing one. But even if you eliminate that cost, you still throw away more money per year owning a home than you do renting.

Owning a home vs. real estate investing

None of this is to say that you can’t make money from real estate investing. In fact, It’s important real estate can be incredibly profitable. But your primary home is not an investment property.

When you purchase an investment property, the increasing home value isn’t really where you make your money. You make your money by renting out the property and bringing in passive income each month.

Is renting better than buying?

You might be reading this article and think that I’m saying homeownership is a bad idea or a waste of money. But that’s not remotely true. In fact, my husband and I are saving for a home right now.

We want to own a home because we love our community, and we want to become a more permanent part of it. We want a space that’s truly ours. We want a yard where our dog can run around and where we can entertain friends.

There are also many reasons I love renting a home. I love that I don’t have to mow the lawn in the summer or shovel the snow in the winter. I love that if an appliance breaks down, my landlord replaces it. I love that if I want to move, I can do so with very little notice, because I don’t have to sell a house first.

There are many great reasons to own a home, and there are many great reasons to rent. But the benefits of homeownership aren’t financial.

Final Thoughts

We’ve all heard the financial myth that renting is throwing away money. And while there are many great reasons to own a home, thinking that you’re saving money isn’t one of them. In fact, as we figured about above, you actually throw away a lot more money by owning a home.

The good news is that you can make the right choice for yourself, regardless of what your parents or society told you.

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Do you know what you’ll be doing with your money five years from now?

Chances are, no. Five years seems so far away, and it’s hard enough to figure out what you’re going to do with your money next month, let alone years from now. 

But data consistently shows that those with a written plan are far more likely to reach their goals. And by making a plan for your future money, you can make intentional choices and have the exact future you envision.

How to Create a Five Year Financial Plan

Why create a five-year financial plan?

I what you’re probably wondering: Why five years? It seems like an arbitrary amount of time, but it’s really not.

Five years is a short enough period of time that you can reasonably set goals for that period. While you don’t have a crystal ball, you may be able to picture what you’d like your life to look like five years from now.

Five years is also long enough that even for those bigger goals, five years could be long enough to help you save up enough money and accomplish them.

Saving for the down payment on a home seems daunting when you decide you want to buy next year. But if you know you’ll want to buy several years down the road, you can start saving early.

Five years seems like a long time, but it goes fast. And if you don’t make a financial plan for those five— years, they’ll pass before you know it.

How to create a financial plan

Identify your values

I truly believe that the first step in any goal-setting exercise — whether it’s setting an individual goal or making a full-blown financial plan — should be identifying your values.

Far too often, we live our lives on autopilot doing the things we think we’re “supposed to” be doing. But we haven’t taken the time to really decide whether that life actually aligns with our values.

One of the first exercises I do with my money coaching clients is helping them to identify their most important values. From there, we can make sure their budget prioritizes those values. And then, we can set financial goals that align with them.

So think about what you value. Maybe you value freedom, and that manifests itself in travel. Or maybe you value security, and a life well-lived would include buying a home and having a large nest egg. 

If you’re having trouble thinking of values, you can literally just Google “list of values.” You can read through it and see what resonates with you.

Envision your life five years from now

As you sit down to craft your five-year financial plan, consider what your next five years will look like. Envision your life one, and then three, and then five years from now.

Where do you live — both the location and the actual home? What do you do for work? Are you married? Do you have children? What hobbies do you do in your spare time? What kind of car are you driving? What trips are you taking?

It might seem like you can’t possibly know what you’ll be doing five years from now. But if you really think about it, I’m guessing you can come up with a vision for what you might like to be doing.

As you picture your life in the future, write down everything you see.

Set specific financial goals

Alright, you know that list you just made of what you envision for your life in the next five years? Well, it’s time to take that list and turn it into specific financial goals.

For each thing you’d like to accomplish, write down the date you’d like to accomplish it by and how much it will cost.

Some of these will be easy. You might know that a big goal is to become debt-free in the next few years, and you currently have $50,000 in debt.

But some might be trickier. Maybe you think you’ll be having a wedding in a few years but have no idea how much you’ll need to save.

No matter what your goal is, chances are you can do a little research to find out how much you can expect to spend.

Once you have your list of goals, I want you to do one very difficult thing: prioritize them.

I know it’s hard to look at a list of goals and decide which you want to come first. But at the end of the day, it’s easier to save for one big goal than many.

I recommend putting them in the order you’d like to achieve them and going all-in on the biggest one. That way, instead of making little progress on many things, you can make big progress on one.

Read: How to Set Financial Goals

Determine specific savings targets

Once you’ve figured out what goals you plan to save for over the next five years, it’s time to figure out how much you’ll save.

When you sat down and identified your goals, you hopefully identified when you want to reach each goal and how much it will cost. If so, this part should be pretty easy.

All it takes is a little math. Divide the amount you need to save for your goals by the number of months you have to save. You’ll know how much you need to save each month to make it happen.

You might see that number and realize you could be saving even more. That’s great news because it means you can move onto the next goal that much faster.

On the other hand, you might see the number and realize that your current list of goals isn’t exactly realistic over the next five years. That’s totally fine and pretty normal.

In that case, you have a few options:

1. Adjust your expectations so that your goals fit within your current saving capabilities, or
2. Decide that you’re willing to do what it takes to reach your goals no matter what, even if it means either drastically cutting your spending or increasing your income, or
3. Do a little of each. Adjust your goals slightly, but also reduce spending and increase your income to make sure you can reach your goals.

It’s okay for goals to feel a little uncomfortable.

When Brandon and I first set the goal of buying an RV and traveling full-time, I didn’t actually think we’d be able to do it. I ran the numbers dozens of times, and it just never seemed possible. But low and behold, we accomplished our goal, and we even did it ahead of schedule.

So I guess what I’m saying is plan as much as you can and leave room for a little bit of magic.

Stick to a budget

Yep, we’re going to talk about the B-word. I’ve talked to so many women over the years who tell me they hate budgeting and they want a way to reach their goals.

And yes, there are personal finance experts who will tell you they can help you reach your goals without a budget. But then they describe the spending plan they teach, and it sounds an awful lot like a budget, just with a different name.

At the end of the day, the only way to be intentional about the amount of money leaving your bank account each month is with a budget. And when you budget, it’s easy to create a five-year financial plan because you know how much you’ll be able to save each month for the foreseeable future.

If you don’t have a monthly budget yet and aren’t sure where to start, you can use my guide: A Step by Step Guide to Creating a Monthly Budget.

Track your progress

Tracking your progress is one of the most important steps to any plan, and your financial plan is no exception. After all, it’s all about follow-through. And how will you know if you’re following through if you don’t actually track your progress?

I track my progress in a couple of ways:

1. I sit down each week and update my budget and spending tracker to make sure I’m staying within my monthly budget. If I’m not staying on track, I can cut back as needed.
2. I sit down each month and plan my budget for the following month and update my net worth. If I went over budget the previous month, I adjust, either by changing how much I budget for or figuring out how I can cut back in certain areas.

Create an annual check-in

As you make your way through your financial plan, it’s important to check in on your progress.

And while we’ve already talked about tracking your spending and your progress on a more granular level, it’s important to check in on the bigger picture too. Sit down each year and take an inventory of where you planned to be at that time versus where you actually are.

By scheduling an annual check-in, you can change course if things aren’t going quite the way you expected them to be.

It might be that you check in on your financial plan and find that you’re falling behind. In that case, you can either find a way to speed up your progress or adjust your expectations.

On the other hand, you might check in on your plan and find that you’re ahead of schedule. That’s great news! In that case, you can adjust your goals to accomplish even more in your five-year plan.

What to include in your financial plan

An annual and monthly budget

A five-year financial plan seems like a huge undertaking, and it definitely is. And if you look at it as one big picture, then it’s going to be hard to make strides.

Included in your five-year plan should be annual and monthly budgets.

The concept of a monthly budget is pretty common. You figure out how much money you have coming in each month, and you create a plan for exactly how you’ll spend it.

The idea of an annual budget isn’t quite as common, but it’s still an important way to make a plan for your money.

Creating an annual budget can help you identify those less common expenses, such as your annual vehicle registration or holiday spending. I use sinking funds to save for these expenses and my annual budget to plan for them.

Read: What Are Sinking Funds and Why Do You Need Them in Your Budget?

An annual budget can also help you to see what’s going to be happening with your money three, six, nine, and twelve months from now.

Here’s an example: Let’s say you’ve got a monthly car payment, but you’ll be paying off your loan in just a few months. When you use an annual budget, you’ll know ahead of time where you’ll reallocate that money each month. As a result, you have a better idea of when you’ll reach your next goal after that.

I love planning, and helping people to craft long-term financial plans is one of my favorite things, but I also know that the foundation of every great financial plan is your budget.

An emergency fund

Building an emergency fund should be the first step in anyone’s financial plan. It helps prevent future financial mishaps from becoming disasters and helps set a solid foundation for the rest of your financial goals.

There are two reasons you need emergency savings:

• One-time emergency expenses
• Income replacement in the event of a job loss

There’s definitely some debate as to how much you should save in your emergency fund. Certain financial experts recommend saving just $1,000 while you’re paying off debt, but I’d strongly recommend against this.

As a minimum, I recommend saving three months of expenses in your emergency fund. Once you’re debt-free, I’d go even further and shoot for at least six months of expenses.

One of the reasons an emergency fund is so important is that it helps you avoid future debt.

Imagine you didn’t have an emergency fund and had an emergency $1,000 car repair. If you put it on the credit card and it takes a few months to pay it off, you’ll pay interest, meaning your emergency costs even more. But if you had an emergency fund, you could just pay for it and be done with it.

Read: How to Build an Emergency Fund & How Much to Save

Debt payoff

If you’re paying off debt, that should absolutely be a part of your five-year financial plan. Now, depending on how much debt you have, you may not plan to pay it all off in the next five years. For those with high student loan debt — which is many people these days — it’s okay to take longer if that fits your plan better.

The first step to creating your debt payoff plan is to decide which strategy you’ll use to pay down your debt. The two most popular strategies are the debt snowball and debt avalanche.

The debt snowball is where you prioritize your debt based on balance, paying down the smallest debts first. The debt avalanche is where you prioritize based on interest rate. You pay down the debt with the highest interest rate first.

The other decision you’ll have to make is how much you’ll put toward debt each month. It can be tempting to pay just the minimum payments and use the money for other goals. But I highly recommend paying at least some extra to pay it down faster.

Paying your debt off early can help you save hundreds, thousands, or even tens of thousands of dollars on interest. And if you have high-interest debt like credit cards, I think that should be your absolute priority. 

I recommend using a tool like Undebt.it to help you plan your debt payoff. You can experiment with the order and see how much faster you’ll be debt-free by paying just a little extra each month.

Financial goals

Your financial plan should also include any other financial goals you might be saving for. In fact, this right here is why a five-year financial plan is so important. When you can anticipate the goals you’ll want to reach several years from now, you can start preparing for them now.

When crafting your financial plan, map out when you hope to achieve each of your financial goals and how much they’ll cost. From there, you can easily figure out how much you need to save each month.

Common financial goals include:

• Buying a home
• Taking a vacation
• Going back to school
• Starting a business

…and many, many more.

Major life events

As you’re mapping out your financial goals, be sure to map out any major life events you think will come up over the next five years. Unfortunately, we often don’t start planning and saving for these until they’re upon us, and then it’s hard to catch up.

Major life events to consider in your financial plan include getting married, starting a family, or moving to a new city.

Even if you don’t know for a fact that one of these things will happen, you can still plan and save for them. Plenty of people start saving for a wedding long before they’re engaged or start saving for kids long before they’re pregnant.

Retirement savings

When you’re young, it’s easy to brush off saving for retirement, thinking you have plenty of time. This is how I felt for years, and I was incredibly lucky to have an employer that required us to contribute a certain percentage of our income to our retirement accounts each year.

No matter your age, retirement savings should be a part of your financial plan. Your age and how much you want to have when you retire will determine how big a part of your financial plan.

For younger people who don’t plan to retire until they’re 60s, saving for retirement is actually pretty simple.

The Securities and Exchange Commission reports the stock market produces a return of about 10% per year. Using that number, if you start saving when you’re 25 and invest $250 per month until you’re 65, you’ll retire with more than $1.3 million.

In some situations, you may need to save more per month to reach your retirement goals. That might be the case if you’re closer to retirement age or if you’re working toward early retirement.

Not sure how much you need to save? The NerdWallet Retirement Calculator is one of my favorite tools to help figure it out.

Additional income streams

I’ve found increasing my income to be the best way to speed up my financial plan and reach my big financial goals. And the good news is, there are many ways to do this.

Many people hope to start their own business someday. If this is you, make sure it’s a part of your financial plan. Online businesses today often quire little start-up costs, but it’s worth setting aside money either way. Luckily, you’ll ideally then see a return on that investment.

If you aren’t interested in starting a business and simply want a way to increase your income temporarily, that’s even easier to do. 

There are plenty of side hustles — either online or in-person — where you can earn extra money in your spare time. Once you know how much you can make each month, you can work that into your financial plan to help you reach your goals even faster.

If you’re interested in finding additional income streams, check out my guide on how to earn more money this year.

Final Thoughts

Having a financial plan is essential to making sure you are where you want to be in the future. Five years is the perfect amount of time — it’s just short enough that you have an idea of what goals to save for and just long enough that you have plenty of time to save.

Financial planning sounds a lot more complicated than it is. While you might picture sitting down with a financial planner and paying them a pretty penny to put together a plan for you, this is something you can do on your own — and for free!

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Have you ever added up how much time you spend each month on your finances?

Or, separate from the time you spend working on your finances, how much time you spend stressing about your finances?

When I first decided to change my financial situation, it felt like hours per week. Hours per week, and I never seemed to make any progress.

And the more time I spend without progress, the more the stress would eat into every other part of my life.

Finally, I found one trick that saved me time, reduced my stress, and finally started making a difference: automating my finances.

Money doesn’t have to be hard. In fact, sometimes the easiest solution is also the one that makes the biggest difference in your finances.

In this article, I’m sharing why it’s important to automate your finances and six easy ways to get started.

6 Easy Ways to Automate Your Finances

Why it’s important to automate your finances

I truly believe that automating your finances is one of the simplest and most effective ways to take your finances to the next level.

There are a few reasons I think it’s the best way to go:

1. Automating your finances saves you time. Chances are, you spend more time on your finances each month than you think. There’s paying bills, checking your account to see how much money you have left, and so much more. The more you automate, the more time you save.
2. Automating your finances saves you money. Have you ever forgotten to pay a bill on time and gotten stuck with a late payment penalty? Or maybe you didn’t realize how much money you had spent, and so your bank stuck you with an overdraft fee? You can avoid these things when you automate your finances.
3. Automating your finances saves your credit. Anytime you miss a monthly payment, it could have a negative impact on your credit score. And your credit score is what determines if you can get loans and credit cards to help with future goals.
4. Automating your finances helps you reach goals you may otherwise not. I didn’t start really saving money for my goals until I automated my finances. Whether you’re saving for a house, paying off debt, or something else, automating your finances will help you get there.
5. Automating your finances reduces stress. For some people, managing their money is a huge source of stress. Imagine if you could eliminate the things that bring you so much stress, like paying bills each month or worrying about where your money went?

How to automate finances

Ready to start automating your finances? Here are the 6 easy ways anyone can automate. The best part is that each only takes a few minutes to set up, but altogether, they’ll save you tons of time each month.

1. Set up automatic bill pay

If you’re brand new to automating your finances, setting up automatic bill pay is the perfect place to start. It only takes a few minutes to set up and it will save you time each and every month.

I think just about every company allows its customers to set up automatic payments at this point. Some even offer a discount when you use autopay.

Using automatic bill pay has two big benefits. First, it saves you time each month, since you don’t have to sit down and manually pay each of your bills.

The other benefit is that it could potentially save you money and save your credit score.

Things fall through the cracks — it happens to everyone! And unfortunately, sometimes the thing that falls through the cracks is paying a bill on time.

When you’re late on a bill, you’re often stuck with a late payment penalty and a ding on your credit report. By setting up autopay, you never have to worry about that again.

2. Automate your savings

I’m not kidding when I say that automating my savings was one of the most important changes I made for my finances.

Every month, I’d tell myself that I would save whatever money I had left at the end of the month. But somehow, there was never anything left when the end of the month rolled around.

I finally set up an automatic transfer from my checking account to my savings account the day after I got paid each month. I never had to think about it, and I honestly barely noticed having less money in my checking account, and yet my savings was growing.

You can use these automatic transfers for so many purposes.

If you’re still saving up your emergency fund, you can transfer money to a high-yield savings account each month.

Once you’ve got your emergency savings fully funded, you can use your automatic transfers to save for other big goals.

Read: How to Build Your Emergency Fund & How Much to Save

3. Track your spending with a budget app

Many people I talk to find the idea of tracking every expense exhausting. For those people, I recommend signing up for a budgeting app that does it for you.

With most budgeting apps, you can connect your budget to your bank accounts and credit cards, and it automatically pulls in all of your spending. You can also set it up to automatically categorize your spending, so it’s easy to see how much you’ve spent in each category.

I wrote a few blog posts to help you find the perfect budgeting app for you:

• The 8 Best Budgeting Apps for Individuals
• The 6 Best Budgeting Apps for Couples

4. Set up extra debt payments

If you’re working on paying off high amounts of debt, you know how long it can take. And the best way to speed up is to make extra debt payments using either the debt snowball or debt avalanche. 

When you set up an automatic payment, you’re committing to putting extra money toward your debt each month. And that commitment is what’s going to get you debt-free ahead of schedule.

You can do this two ways. First, you can set up an extra payment each month. Or you can just automate your normal monthly payment, but schedule a payment that’s larger than your minimum required amount.

5. Automate retirement contributions

I’m almost certain that if my first employer after college hadn’t required me to put 7% of my paycheck into a retirement account each month, I wouldn’t have saved for retirement at all. 

Honestly, it just seemed so far away, and like I had years before I had to worry about it.

Now, almost a decade later, I can’t tell you how grateful I am that my employer required automatic retirement contributions.

If your employer offers a 401(k) plan, by far the easiest way to automate your retirement savings is to have your employer take money out pre-tax and put it into your account. If you’re lucky, they might even offer to match a portion of it.

If your employer doesn’t offer a retirement plan — or you’re self-employed so you are your employer — you’ve still got plenty of options.

For those with an employer who doesn’t offer a 401(k), I recommend setting up an individual retirement account (IRA) and setting up automatic monthly transfers.

If you’re self-employed, even if you just run the business alongside your full-time job, you’ve got even more options. I wrote an entire guide about how to save for retirement when you’re self-employed.

Not sure how much to save? There are plenty of online retirement calculators to figure out how much you should save each month to have enough for retirement — I recommend NerdWallet’s calculator.

6. Set up free credit monitoring

Your credit score is one of the most important numbers in your overall financial picture. And anything that goes onto your credit report is likely to impact that score in either a positive or negative way.

Far too many people don’t find out about negative marks on their credit report until they apply for a loan and the bank breaks the bad news to them.

There are plenty of services — some of them even free — that automatically monitor your credit for you. I use Credit Karma, and one of my credit cards also offers this service for free for having their credit card.

If a negative mark shows up, you’ll know about it right away.

Read: 7 Hacks to Boost Your Credit Score Quickly

Final Thoughts

Automating your finances is one of the simplest, and yet most effective ways, to take your finances to the next level. You can start slow, with setting up automatic bill pay.

Once you’ve checked off everything on this list, you’ll notice how much less time you spend worrying about your finances each month.

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Tax season is always bittersweet. You dread collecting all of your tax forms and going through the actual labor of preparing your tax return. But it often ends with a tax refund, which is something to get excited about.

I remember how excited I was to get my tax refunds in my early twenties. But looking back, I couldn’t tell you a single thing I did with that money. My guess is that I squandered most of it on unplanned and unneeded expenses.

In retrospect, I really wish I’d used that money more wisely, perhaps to pay off debt or fund one of my big goals.

In this article, I’m sharing 12 ways to use your tax return wisely, as well as three things to avoid doing with that money.

12 Things to Do With Your Tax Return

There are affiliate links in this post, meaning I may make a small commission at no additional cost to you. For more information, see my full disclosure policy here.

1. Build your emergency fund

If you don’t currently have an emergency fund, building one should be your first priority when you get a tax return.

People often underestimate just how important an emergency fund is. Almost 25% of Americans have no emergency savings at all, and only 41% of Americans would be able to cover a $1,000 emergency with savings.

Unfortunately, these expenses come up. You never know when your car will break down or you’ll have an unexpected medical bill. And without an emergency fund, people usually have to resort to debt.

The pandemic also showed us just how important an emergency fund is. Millions of Americans lost their jobs, without savings to fall back on.

Not sure how much to save? I generally recommend saving at least one month of expenses while paying off debt and at least 3-6 months of expenses once you’re debt free.

Read: How to Build an Emergency Fund & How Much to Save

2. Pay off debt

Paying off debt can feel impossible at times. You make your monthly payments, but somehow never seem to make any progress.

Extra income injections like tax returns are an excellent way to pay down your debt faster. If you have high-interest debt like credit cards or personal loans, that’s a great place to start. If you don’t have high-interest debt, you can put your tax return toward student loans, a car loan, or your mortgage.

Depending on how big your tax return is, you might be able to make a big dent in your balance. And even if it’s just a small amount, it’ll reduce the amount you pay in interest over the long-run and help you become debt free more quickly.

Read: Debt Snowball vs. Debt Avalanche: Which Debt Payoff Strategy is Right for You?

3. Fund a financial goal

Your tax return can be a great way to pay for a financial goal you’ve been dreaming of, like a big vacation or home renovations.

Your tax return can help you reach your goals even faster. And if you don’t have much wiggle room in your budget, your tax return might be just what you need to reach that goal that didn’t seem possible.

Read: The Best Money Goals to Set in 2021

4. Get one month ahead in your budget

Most people spend their money as (or even before) they earn it. For example, many people struggle to balance the timing of their bills with their paychecks to make sure they have enough in their bank account. Others use their credit card for everything and then pay it off the next time they get paid.

While this might work for some people, it often means spending money you don’t have. Plus, you’re living paycheck to paycheck, and a single late paycheck could result in having to pay your bills late.

The best solution to this is to get one month ahead in your budget. So instead of using your paycheck for this month to pay this month’s bills, you’ll actually use it to pay next month’s bills. 

Here’s a full guide to help you get one month ahead on your budget.

5. Start a business

Starting a business was one of the best decisions I’ve ever made. It provided extra income while I was working at my government job. And ultimately, I made enough money to quit my job and run my business full time.

I was pretty lucky in that my business required almost no start-up costs. I paid for the cost of a website domain and a few other small things, and I was ready to go.

But looking back, there’s a lot more I could have done in terms of education and coaching. And many people start businesses that require more start-up costs. 

If you’ve been thinking about starting a business, commit to using your tax return this year to get it up and running. You won’t regret it!

6. Advance your career

There are so many opportunities today to advance your career through continuing education, training, or additional certifications. Unfortunately, those things cost money and many employers can’t foot the bill.

If you’re getting a tax return this year and don’t have other plans for it, consider what steps you could take to further your career or help you get the credentials you need to change careers. 

7. Fund an HSA

Healthcare costs have been increasing steadily over the years, and many families just can’t cover them.

Unfortunately, medical bills have become the primary reason for bankruptcies. And it’s not just people without health insurance. High deductibles and poor coverage mean that many people with health insurance still end up with huge out-of-pocket costs. 

Luckily, there’s a great option to help you save for future medical expenses.

A health saving account (HSA) is available to anyone with a high-deductible health plan. It has triple tax advantages. First, contributions are tax-deductible. Next, you can invest the money and it grows tax-free. Finally, you can spend the money tax-free on qualified medical expenses.

If you have a high-deductible health plan, I highly recommend opening an HSA!

8. Donate to a charity

One of the great things about tax returns is that it’s often money you forget you have coming. You aren’t counting on it to pay any bills, meaning it’s just a bonus.

If you aren’t relying on your tax returns to help pay your bills, build an emergency fund, or pay off debt, I encourage you to consider donating at least part of it to charity.

There are so many people struggling in our communities, and it’s only become worse since the pandemic began. Chances are there are many people in your area struggling to pay their rent or buy groceries.

There are a lot of great organizations out there helping people to make ends meet and keep food on the table. And let’s not forget the organizations helping save animals, research prevalent diseases, and fight climate change. Whatever it is you’re passionate about, there’s an organization working on it that could use your help.

9. Contribute to your retirement account

Many people underestimate the importance of saving for retirement. When it’s decades away, it’s hard to see it as an immediate need. But the thing is, your money has more time to grow the earlier you start saving!

If you aren’t currently saving for retirement, consider starting now. And even if you’re already contributing to a 401(k) through your employer, you can set up an individual retirement account to help you save even more.

10. Save for college

College costs have grown like crazy. In 2021, the average student at a four-year in-state public university spends more than $25,000 per year. And if you’ve got small kids at home, costs might be even higher by the time they head off to college.

There are several good options to help to save for your child’s college education. First, a 529 plan is a tax-advantaged account specifically designed to help you save and invest for college. Another option is a custodial account, which parents can open on behalf of their children to save and invest.

11. Invest through a taxable investment account

If you already have a fully-funded emergency fund, have paid off your debt, and contribute regularly to a retirement account, you might consider using your tax return to invest through a taxable brokerage account.

I don’t recommend doing this until you’ve got your financial house in order otherwise and are already on track to hit your retirement goals. But if you can check those boxes, investing can be a great way to grow your wealth and help you to reach other financial goals.

Not sure how to get started? My current favorite investing book is Broke Millennial Takes on Investing by Erin Lowry.

12. Adjust your withholdings

Some people love getting a huge refund every year. They see it as free money they can spend or use to fund their goals.

But here’s the thing — it’s not free money. It’s money you worked hard for that was unnecessarily taken out of your paycheck. Money that could have earned interest in a savings account or that you could have used to cover expenses throughout the year.

Unless you’re dead set on receiving a refund each year, consider adjusting your withholdings to have less money taken out of your checks. Just make sure you have a plan for that money so you aren’t mindlessly spending it throughout the year. 

What not to do with your tax return

1. Use it to go further into debt

Here’s an all-too-common scenario: Someone gets a tax return and decides to use it to upgrade their computer or another high-value item. Their tax return isn’t big enough to cover the cost of the entire computer, so they put the rest on a credit card.

Now you’ve taken your tax return and somehow used it to get into even more debt.

I’m all for using your tax return to put toward big items you’ve been saving for. Just make sure you have enough to buy them outright rather than going into debt to buy them. The only exceptions to this would be using your tax return to help fund a car or house downpayment. 

2. Spend it on unplanned purchases

When I was in my early twenties, I would be so excited every year when I received my tax return. I though of it as free money that I could spend on whatever I wanted.

But instead of intentionally putting it toward my financial goals, I’d spend it mindlessly on clothing, take out, and other things I didn’t plan for and didn’t really need.

It’s okay to spend your tax return on whatever is important to you, just be intentional about it and have a plan for that money!

3. Put it in a low-interest savings or checking account

Whatever you do, be intentional about what you do with your tax return. Without a plan, that money could end up sitting in a traditional check or savings account, not earning you anything. If you want to keep the money in savings, transfer it to a high-yield savings account so you can earn more interest than you would through your traditional bank savings account.

Final Thoughts

I know how exciting it can be to get a tax return and think of all the things you can spend it on. I also remember the analysis paralysis I felt when I wasn’t sure what the best use of that money was. I hope this post helps you decide how best to use your tax return this year!

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