The only time we’ll ever tell you not to go on a shopping spree.
Tax season, for us, is often just one big UGH moment. Each year, when tax season rolls around again, we wonder why (why?!) they didn’t teach us how to do taxes in high school over teaching us how to type—we would learn the latter through IM-ing anyway, and how much more competent would we feel now if we could actually take on taxes ourselves? If you can, and this is all smh, deal-with-yourself: Great, we salute you. If you’re like us and you end up pawning it off on an accountant (or your dad), fine. But either way, here’s something we can all get together on: the tax return, that nice little chunk of change that feels like a gift after the headache of filing them in time.
In years past, we might have advised blowing your check on a Céline bag (or a quarter of one), but now, we’re *becoming* older and wiser. Here’s the truth: We want things out of life that aren’t basic material satisfaction. Things like fancy weddings, homes that we own, cars, vacations... Life stuff. It’s hard to wrap our heads around saving for those extra big things, frankly, and we have no idea where to start (see the above struggle to even file our taxes), so we called up our friendly neighborhood financial adviser, also known as SoFi’s president of wealth, John Foley. When you listen to his soothing voice over the phone, it’s quite literally like you’re speaking to an angel from heaven who is going to clear up and organize any financial chaos you might currently be facing (and, honestly, the whole SoFi organization is the least intimidating way to deal with finances ever). The bad news? There are no totally easy answers as to how to make your money grow. “If you see the term[s] ‘foolproof’ and ‘investment’ together, run,” he says. “There really is no such thing.” But with just a little bit of knowledge and planning (we’re here for you!), you can turn your tax return into that retirement savings account you’ve been meaning to start. Here’s what to do with that chunk of money that is your tax return.
1. PAY DOWN YOUR DEBT
“People will buy expensive things [like CHANEL handbags] because it makes them feel rich and special. You can spend money to make you feel rich, rather than doing things that will actually someday make you really be rich. The first step is to pay down your debt, particularly if you have credit card debt. Among households that carry a balance, the average balance is over $16,000—a lot of money, especially when the average interest rate is generally over 16 percent. One of the first things to do [with a tax return] is pay down any debt that you have. If it’s really out of control and your tax return isn’t even going to make a dent in your credit card debt, it might be worth it to refinance with a personal loan that will spread out all your credit card debt over a couple years at a lower interest rate to get that under control.
If you have student loans, that’s another great place to put your tax refund. If you have a $30,000 student loan, pay down the loan. Be careful, because some student loan processors will not put the money towards reducing your debt; they’ll just put it towards future payments. If you put it towards the principle, that means that going forward, you’re paying interest on a smaller amount of money, which will save you a lot of money.”
2. BEGIN INVESTING
“If your company has a 401(k) plan, one thing that is a no-brainer is if they have a matching program. Many companies will match your contribution for a 401(k), sometimes dollar for dollar. If they do match your contributions, that’s basically a guaranteed return. You really should take advantage of that. You can’t just take your tax return and put it in, but make your 401(k) contributions by reducing your paycheck, so if you make a deduction and that will eat into money that you need to live, set your tax return aside to cover those expenses.
It’s really important for you to start investing early. Your 60-year-old self will thank your 25-year-old self. If you put $5,500 in an IRA (Individual Retirement Account) starting when you’re 25, and when you get the typical rate of return—about 7 percent—and continue putting money in for 30 years, you’re going to have over $1 million. If you start when you’re 35, you’re going to have to put more in or you’re going to end up with a lot less. Put a lump sum like a tax return in first just to get started, and then be disciplined and put a little bit in every month after that—then you’re in a great place.”
3. CONSIDER YOUR IMMEDIATE SAVING GOALS (like, say, a big, fancy wedding)
“It depends on the timeframe, but if you know that you’re getting married in 18 months, then you want to keep that money safe. You don’t want to put it into a fund, because it can go down. The smarter thing to do is put your tax return in a money market or savings account. The bad news is that interest rates are very low and you won’t make money off these accounts. However, if you look around, you can find accounts at different banks that pay over 1 percent.
If this is more of an amorphous goal—you want to get married someday, but you haven’t met the guy yet—then you can take a bit more risk. Think of it as a part of your larger investment portfolio, and pick the right risk level for you. Generally, have some money in stocks and some in cash.”