It’s that time of the year: many people are beginning to look for their tax refunds. If you were on top of things and e-filed early, you might already have a refund. If you are looking forward to a tax refund, you are probably considering what to spend it on. Before you do, though, consider your options. Here are some tips that can help you avoid wasting your tax refund check needlessly.
Before you decide what to do with your tax refund, divide it, and put most of it into a savings account. Then, divide the remainder between you and your partner, for “allowance.” This is one way you can keep from spending all of the money at once, on something you might regret later.
Plus, if you and your partner each get a small amount of the tax refund to spend on something you each want, you are less likely to feel deprived, also reducing the chances that you will overspend.
Next, with that money sitting in your savings account, think about what would most benefit your financial situation. Do you have high interest debt? Would you like to put a little more into your retirement account? Is your emergency fund looking a little empty? Does your car need repairs? Look at what you need money for, and look at your financial goals.
If you want to get rid of your high interest credit card debt, you should pay down your credit cards with your tax refund.
If your washing machine just broke, maybe you should consider using part of your refund for a new one.
Prioritize your goals, and decide what moves are most likely to help your current situation, and apply your tax refund to the most important goals first.
The surest way to waste your tax refund is to buy something on impulse. In many cases, a tax refund is a significant sum. While it isn’t really “found” money, many people treat it this way, blowing it all at once on something that doesn’t really benefit them. Instead, your tax refund should be used thoughtfully. Keep the bulk of your tax refund money in an account that is a little more difficult to access. This will force you to think through purchases you might be considering, rather than just handing over the money (or, more likely, the debit card).
Look at your tax refund, and try to determine why it is as big as it is. The last time I got a tax refund was the year after we bought a house, and got an interest rate deduction for the first time. Since I’m a freelance writer, my estimated quarterly taxes had already been figured, and I paid the required amount. The mortgage deduction changed everything that year. When figuring my quarterly taxes after that refund, I arranged things so that my budgeted amount for taxes was more in line with the new situation.
For many, though, the source of a tax refund is withholdings from a regular paycheck. You’ve probably heard that the money is an interest-free loan to the government. This is true. A tax refund isn’t a true windfall. For most people, it’s money that they already have; they just haven’t had access to it. Consider whether or not you could use that money more wisely over the course of the year. Could some of that money be working for you by going toward your retirement savings? Would a little extra each month mean one less charge on the credit card? These are things to think about.
I knew someone who adjusted his withholding so that he was no longer getting a big refund. Every paycheck he takes the difference and deposits it in a high yield savings account. Then, each year on April 15, he takes some of it out and does something fun, or buys something he wants (he is debt-free, so doesn’t have to worry about paying down debt). Of course, before adjusting your withholding, you have to consider whether you would use the money wisely if you had slightly more in take home pay each month.
I write about things that have (and haven't) worked to improve my family's financial situation. What works for me may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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