How to Use Your Tax Refund (Besides a Spending Spree)
As a CERTIFIED FINANCIAL PLANNER™ and a financial coach, I field many questions this time of year about taxes. Getting your tax refund is an AMAZING feeling. When that money hits your bank account, or you get that check in the mail, most people breathe a small (or large) sigh of relief. Many of us know exactly what we need to put that money to next and get right on it. However, many people are also baffled about what to do with that money. It’s not uncommon that people feel as if it’s finally their chance to go on that much-awaited shopping spree and get all of the gadgets, clothes, and luxuries that they’ve been looking forward to.
However, a shopping spree often isn’t the answer. While it can be fun to go out and spend a bunch of money eating out and buying things - we’re often left with a sense of guilt knowing that money could have been better utilized. So, how can you avoid that post-tax refund shopping spree buyer’s regret? I’ve compiled a small list of my favorite non-regrettable ways you can use your tax refund that will leave you with a sense of accomplishment and the knowledge that you’ve put your money to good use! Getting in touch with a CERTIFIED FINANCIAL PLANNER™ or financial advisor representative is a great way to effectively kick off using your tax refund! With a financial planner, you can create a customized financial plan that will help you not only utilize your tax refund but all of your income.
Tax Day is Delayed This Year!
Oh yeah, before we start, there’s some excellent news for those of us who procrastinate! Tax day has been pushed back as a form of Covid relief. Specifically, it’s been moved from April 15th to May 17th. However, if you haven’t done your taxes by now, it’s time to go ahead and tackle them. Getting your taxes done and over with is one of those small things that takes a significant load off your shoulders. If you’ve delayed doing your taxes up to this point, do yourself a favor and get them out of the way!
What You Could Do With Your Refund
As I said, we all know that a shopping spree is an option; however, it’s not necessarily a great one. While you’ll gain a few nights of fun out on the town, you’ll be missing out on some great opportunities. Without further ado, let’s go ahead and kick off our list of great ways that you can make your tax refund work for you intelligently!
- Start an Emergency Fund.
If you don’t already have one, an emergency fund is a FANTASTIC thing. Essentially, an emergency fund is a pool of money that you can use in case of an emergency. These aren’t meant to use as a savings account; instead, you should contribute a regular amount to your emergency fund and have it set back should you ever need it. You could use your emergency fund to do things like: pay for unexpected medical bills, pay for necessary home repairs, or help you bridge the gap should you lose your job.
Your tax refund depends on how much you’ve earned/contributed over the year. However, most people will find that a tax refund is a fantastic jumpstart contribution to their emergency fund. Generally speaking, your emergency fund should be able to cover you for at least six months and up to a year without income. If you’d like to read more about emergency funds, please read my article about them, Why An Emergency Fund Should Be Part of Your Financial Plan. In it, I outline just about everything you need to know about getting started with creating and planning for an emergency fund. If you’d like to know even more, contact a CERTIFIED FINANCIAL PLANNER™ or representative like myself.
- Start Another Savings Account and Create Buckets!
If you already have an emergency fund, you could also use it to buff up a proper savings account. Having a savings account is a great way to kick back money over Time to afford a more significant purchase or down payment! While an emergency fund is your way to avoid debt by having money put aside for emergencies, this is your way to avoid debt by saving money for a specific purpose. Many people rack up savings accounts and use them as “buckets.” Buckets keep money separated, so you know how much money you have saved for each planned future expense. For example, you could have money set aside in a bucket for a new car, a down payment for a house, paying off debt, or saving for general long-term goals.
If you’re interested in learning more about buckets, I’ve also written an article about that! How Buckets Fit into Your Financial Plan outlines buckets, what they are, and how to use them!
- Pay or Save for a Vacation!
It’s unfortunately relatively normal for people to pay for their vacations after the fact by using credit. The name of the game is to make the life you do have easier, not to create and justify new expenses. Instead of using credit, where you may rack up interest - use your tax refund! You may have enough to start saving for a large vacation or to pay outright for a smaller vacation. While I wouldn’t recommend using your tax refund as an excuse to go on a vacation, it’s a great way to put money towards one that you’re already planning.
- Make a Mortgage Payment
Yet another fantastic way to use your tax refund is to put money towards your mortgage! There are two ways that you might go about doing this. For starters, you could always just go ahead and put more towards paying your mortgage down. If that’s not your style, you could also put that tax refund in a bucket for your mortgage. If you do the latter, you’re putting yourself a month ahead and ensuring that you’ll always have your next payment.
If you’re not sure about which direction to go, but you’d like to put your tax refund towards your mortgage payment, you really can’t go wrong. Either way, you do it; you’re making strides towards your long-term goal of being mortgage-free! If you’d like to discuss which option is best for you, I’d suggest meeting up with a certified financial planner or financial advisor to see where you stand.
- Pay Down Your Student Loans
Student loans can be a real burden, so why not use your tax refund to pay them down! My advice for this is very similar to my mortgage advice. You can either use your tax refund to pay off/pay down your student loans, or you could put that money in a bucket, ensuring that you’ll always have that next payment. If you feel that your student loans are becoming burdensome, you may have options! Meet with a financial professional to see if consolidating your student loans, applying for an income-driven repayment plan, or something else may help you meet your obligations.
- Pay Some Bills Early or Eliminate Some Debt
Paying bills early or starting buckets for them is a fantastic way to stay on top of your financial plan! Getting a month ahead of your bills is never a bad option, and it’s a great way to give you some wiggle room and freedom. Possibly the worst thing you could do with your tax return is to go off the deep end on a shopping spree and forget about bills altogether! A much better option is to get ahead of your bills and use what’s leftover to have some fun. Knowing that you’re being responsible will leave you with a sense of accomplishment, and you’ll still be able to have a little bit of fun.
Alternatively, you may have a loan or an account that’s so close to being paid off. If that’s the case, you can put your tax refund to good use by getting that debt or account cleared away! While this may not be the most fun way to use your refund, it will allow you more freedom down the road, and you won’t regret it!
- Start Saving or Contribute to Retirement
Speaking of more freedom down the road, it’s never a bad time to start saving for retirement. In fact, the earlier you can start contributing to a retirement account, the better! If you’re up to date on your bills, have an established emergency fund, and don’t have any loans or payments to make - it’s Time. Contact a financial professional or CERTIFIED FINANCIAL PLANNER™ to begin realizing your dreams of retiring and finding out your best options when opening a retirement account. If you’d like to learn more about retirement, I’ve recently posted this article: How Pensions Work With Your Financial Plan.
- Treat Your Tax Refund Like a Dividend - Reinvest It!
I recently wrote two articles about Reinvesting Dividends and Dollar Cost Averaging, but I’ve also written about Compounding interest. While you won’t get some of the benefits of reinvesting dividends that companies offer, investing your tax refund will provide benefits in the form of sound financial principles. By investing your tax refund into something sound that you’re already investing in, you’re potentially growing your money exponentially. This is because you will earn dividends based in part on the tax refund that you’ve invested. By continuing to reinvest those dividends, you’re taking advantage of compounding interest. This allows your money to continue adding fuel to the growing fire of your investment.
Treating your tax refund like a dividend isn’t going to immediately get you that new iPad or pay for that expensive dinner. However, down the road, it may be able to help you buy as many iPads or fancy dinners as you’d like! If you’re interested in investing in a time-tested way that utilizes sound financial principles, meeting with a financial planner could be the best time investment you’ve ever made.
- Make a Tax-Deductible Donation
It’s never too early to start thinking about next year and next year’s taxes. If you’re interested in working your principles into your financial plan, donating to a charity may be the way to go! Donations to non-profits and charities can be deducted from your taxes. This means that if you’re in the position to pay taxes at the end of the year (like many business owners), you’ll reduce that amount and potentially get a larger refund when everything’s settled next year.
Donating to charity or non-profits is also a great way to raise morale and feel like you’ve contributed something good to the world. These small boosts to your morale and self-esteem can take you far and reinvigorate your passion for your financial plan.
- Divvy It Up!
Hey, there’s no reason that you have to limit yourself! Your tax refund can be used in any way that you want. In fact, nothing is stopping you from paying off some debt, kicking back some money to your emergency fund, and then having a nice dinner with the rest of it! Of course, that depends on how large your refund is, but you can always make the most of it!
In my article Growing Your Savings Rate in Your Financial Plan, I talk about the 50/30/20 rule. This is the idea that you use 50% of your after-tax income for needs, 30% for wants, and 20% for savings! Using the 50/30/20 rule regarding your tax refund is a great idea that lets you have a little fun while avoiding the feeling that you wasted your refund!
If You Haven’t Started Your Taxes, There’s Still Time!
Getting your taxes done early is a great way to expedite getting your refund. Often if you get your tax refund in before the rush, you’ll reduce the wartime for your refund. However, if you haven’t quite gotten your taxes done, don’t give up! Go ahead and take care of those taxes and then sit back, relax, and think of all of the fantastic ways that you’ll use that refund to get ahead!
A CERTIFIED FINANCIAL PLANNER™ Can Help you Decide Effective Ways to Use your Tax Refund in Your Financial Plan
If anything in this post resonates with you and you’d like to learn more about investing, saving, and creating a financial plan please, feel free to call or email to schedule an appointment with me. Together we can create a financial plan that helps you become debt-free, make a savings security blanket, and put your money to work for you!
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.