What to do with Your Tax Refund

It’s that time of year when we begin collecting our W-2’s, 1099’s and other documetns to prepare our tax returns.  For some of us, including myself, we get excited about this tax time of year.  The main reason: a tax refund!

I found out last year through a car salesman that the car industry loves tax season.  The reason why?  Because many people end up using their tax refunds to help with a down payment of a new automobile.  A friend of mine last year used her tax refund to purchase a designer purse.

If you get a tax refund, you might view it as a “bonus”.  Unexpected money just fell into our lap.  We get the urge to spend this money on a luxury that we might otherwise have not been able to afford.  It’s YOUR money, do with it as you please, but I will offer some advice on how to spend your tax refund wisely:

Pay down Debt:  Instead of buying a new car with your refund, use it to pay down an existing car loan if you have one.  Make an extra payment or two to a student loan you might have.  Debt is an obligation you will  have to pay down eventually, so why not use the extra money to give you an extra step to being debt free.

Go on a Vacation:  Maybe you feel like you have worked hard, and you probably have.  Use the money, or part of the money, to treat yourself to a vacation.  The enjoyment and peace of mind you can get out of an experience far outweighs any “thing” you might want to purchase.  You will have created lasting memories.  Plus, more than likely, you will be more focused upon your return.

Just save it:  Suppose you are 25 years old and receive a tax refund of $1000.  If you used that money to open a Roth IRA or put it in a taxable brokerage account, you will be well on your way to creating future financial freedom for yourself.  Let’s use the following example: You take the $1000 and open a Roth IRA.  If you put in just $100 a month into that Roth IRA, then assuming an 8% return annually, you will have an account balance of well over $300,000 in 40 years.  Granted 40 years is a way off, but that money can help supplement your retirement.  You can also use the refund to build up an emergency fund or to contribute to a taxable brokerage account.

A tax refund is welcomed by everybody who receives one.  You worked hard last year, you paid a little more in taxes then you should have, now it’s the government’s turn to give a little back to you.  Spending our refund on cars, purses and consumer electronics is what American society has conditioned us to do with extra money.  Don’t fall into the trap of what everyone else does with his or her refund.  Use it to create a better life for yourself, for the present and the future.

Budget Smart, Invest Wise

3 thoughts on “What to do with Your Tax Refund

  1. Tim M February 3, 2015 / 7:45 am

    Every year, I get a very small income tax return and I immediately add that money to my savings. It is never enough to make a down payment on a large purchase or to take a trip.

    I understand why people use the tax system to create a sort of enforced savings mechanism. It can be difficult to save on a tight budget and when the money disappears into the government’s hands, you cant spend it on every day items. So it is saved and returned to you on an annual basis. I used to do the same thing until I started thinking about the interest free loan that I was giving the government every year. Now, I adjust my tax withholding each year to minimize my tax return (I don’t want too owe taxes at all, so I estimate my withholding a little on the high side).

    I take the money that I am not giving to the government and have it automatically deposited into a savings account each pay period. I am still saving because I don’t see the money and I am the one earning the interest.

    The only downside it that I have to be disciplined not to transfer that money into a checking account so that I can spend it. So far, I have not touched it at all and my savings is building nicely.

    I know this is not the way to go for everyone, but it is an alternative approach.

    Sorry for such a long comment,

    Tim

  2. Matthew Dunphy February 4, 2015 / 12:16 pm

    Sometimes a vacation is a good expense. As long you are smart about it and budget the trip in your expenses. Just don’t put it on a credit card

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