So You Are Getting a Tax Refund, Now What?
If you are like most people when you get a tax refund you want to go treat yourself with these newfound gains; go on vacation, eat out, buy new clothes or toys, etc.
But you need to treat them like what they really are, delayed income. Hopefully, you don’t blow each paycheck on just fun things that leave you with nothing to show for it, so what really is the best way to spend a tax refund?
- Treat it as a normal paycheck. Hopefully, you have a system in place on how you spend your work income so do exactly the same thing.
- If you do not already have a rainy day or emergency fund open it now with all this money into a separate account you do not plan on accessing except in an emergency.
- Use it to pay on or off your highest interest bill, reducing your monthly expenses.
- Invest in yourself. Pay for a certification class, go to a business convention, pay for your CDL license. Anything that will increase your work value.
- Add it to a down payment you are building for a house. The higher your down payment the lower the loan amount and lowers future monthly mortgage payments.
- Pay for needed vehicle or home repairs. Things that are truly needed not just a cosmetic home improvement.
- Invest in your retirement. Pay into or open an IRA.
- Invest in your children’s future, and pay into or open a college savings account.
- Invest in your business. Buy new equipment, in full, that will improve your work or expand your ability to do new jobs. Pay off any loans you have now to reduce expenses.
- Spend a small amount for fun, ex: $100 for a fun night out for the family.
This is what my husband and I have done with our tax refund for years no matter if it is less than a few hundred dollars or thousands. We have a 20/20/20/20/10/10 plan;
20% to catch up on any overdue bill or prepay any large upcoming one, like quarterly car or house insurance.
20% into savings.
20% to pay on highest interest credit card.
20% to pay for vehicle maintenance, new tires, brakes etc.
10% tithe to the church.
10% for fun.
The main thing is that you try to not have to pay extra at tax time. It is really best to calculate your payroll taxes so that you can bring home as much as possible with each paycheck instead of deferring that money into a large tax refund that you will just have to pay more taxes on again next year.
