Tax season can bring about a feeling of dread for many people. Whether you’re completing your taxes on your own or using a professional, the ever-looming threat of an audit often makes the job stressful. On the bright side, “three in four Americans” received a tax refund in past years. After all that work and stress to file your taxes, you may be thinking of taking a well-deserved vacation with the extra money.
It’s your money
When you think of a tax return, it’s easy to think of it as found or play money. Realize though that this is simply excess money that the government took out of your paycheck. It’s not like finding a $20 bill on the sidewalk. Take a moment to think of where you might need to supplement your financial plan before you jet off to a tropical isle.
Do I have enough in emergency savings?
One of the most difficult financial goals is to motivate people to invest in an emergency fund. As when purchasing insurance, no one wants to think about bad things happening to them. Additionally, it’s boring – all you’re doing is building up a savings plan that might return a few percentage points of growth per year. There’s no sizzle with the account. Yet having a well-stocked emergency fund can give you the freedom to not worry if your car breaks down or even if you lose your job. People I’ve talked to become true believers after that first emergency where they were able to pay without having to go into debt.
Do I need to pay off debt?
When I speak of debt here, I’m talking about high-interest credit card debt. If you have a recurring balance on your credit cards, take a look to see where you can make the most impact with your tax refund. To save the most money on your cards, find the one with the highest interest rates and pay off as much of that debt as you can. Then work down to the next highest interest rate, and so on.
If you’ve gotten in over your head with a car loan, where rates recently have surpassed 10%, you may want to consider if your refund would pay off or take a major chunk out of the loan amount. If rates decline soon, you may also choose to refinance.
Should I invest in myself?
Many companies offer opportunities throughout the year for employees to attend workshops or classes to advance their knowledge. If there are educational opportunities in which your company won’t invest, consider paying for them on your own with your refund. By paying yourself, you may also choose to expand your knowledge base beyond what your job now entails to prepare you for advancement.
Similarly, people hoping to start or grow a small business may use the refund to buy needed equipment or pay for professional services (accounting or marketing) to help grow their business.
Are my retirement accounts fully funded?
I believe every employee should invest enough in their company’s retirement plan to fully recoup any company match. However, that might not be enough to attain the retirement you’re hoping for. Will the tax refund allow you to increase your contributions to the company retirement plan by one or two percent? Do you want to use the refund to start a Roth or traditional IRA? Take a minute to run a few retirement calculators to see if you’re on track.
Do you have kids – and a 529 plan for their education?
The state 529 plan that I haphazardly invested in grew enough to put one child through college with no debt, and my second child has more than enough to finish debt-free as well. While you may not want to over-fund this type of account, you should consider saving regularly in the hopes of covering at least a third of your child’s college expenses.
Does your home need a little TLC?
My record with home maintenance is similar to my past investment in my kids’ 529 plans – it’s hit or miss. I will go on a spree of fixing up the old manse, then let things go for a while until the next inspiration hits me. Having a tax refund check in hand can help make a paint job, new garden, or even a HVAC replacement more palatable.
Are you still using an old cellphone or computer?
I’m not one for always upgrading to the latest and greatest electronics. The computer I write these blog articles on is a refurbished 7-year-old desktop. But it works wonderfully for what I need. Are your electronics still meeting your needs? Note – this isn’t an excuse to buy a new phone just because, but more a chance to strategically upgrade equipment in your life without having to go into debt.
Should you invest outside of your retirement accounts?
Since much of my corporate life involved educating people about saving for retirement, I sometimes neglect to mention other goals. There’s more to life than being able to pay for retirement that may be 30 years down the line. Do you want to save up enough to retire early or perhaps put a down payment on a mountain cabin? Investing your tax refund in an after-tax account may help you reach those goals.
Do you want to start – or add to – your vacation fund?
If your financial life is in order and you’re happy with your investments – retirement, college savings, and after-tax – using your tax refund to pay for a trip you’ve always wanted is a worthy goal. By saving up beforehand, you can relax during your travels knowing you won’t come home to a large credit card bill. And even if you don’t have enough this year to travel, saving a tax refund can boost your account so maybe after you’ll be able to take your trip after your refund next year.
Maybe I should split the refund between investments and fun?
Any time people tell me they received an inheritance or unexpected money, I always suggest they take some of it and do something fun. Maybe it’s a weekend at the beach, maybe it’s just pizza and a movie. But sometimes you don’t need to assign every dollar to a specific goal. This can be the same with a tax refund. Depending on your personal situation, it can be fine to save the majority of it for goals and spend the rest on whatever.
As you contemplate the best use of your tax refund, remember that it is an opportunity to make meaningful progress towards your financial well-being and future aspirations. Whether you choose to pay off debts, bolster your savings, invest in your home or education, or simply treat yourself responsibly, the key is to align your decisions with your long-term financial goals.