Many of us look forward to tax season every year, at least we do after the pain of filing a tax return is over. From previous experience, we know that we are very likely to get a substantial amount of money back from our tax returns, and it’s like Christmas in April – without the snow and credit card bills. But how do you keep from blowing your tax refund and instead put it to good use? Here are a few tips to help you spend that income tax check wisely.
6 Tips for Spending Your Tax Return Wisely
- Set aside a portion for fun spending. Let’s face it, you feel like Uncle Sam has held your hard-earned cash hostage all year, and you feel somewhat cheated on some level. It’s your money! And you want to do something fun with it to get even. The trick is to set a limit on how much you can spend on frivolous purchases – and stick to your budget. For many, 10% is a good number for fun spending when any lump sum income is expected, but you decide how much is appropriate for your circumstance. Just set your limit before you have the check in hand to avoid the temptation of overspending. You know it, and I know it – you’re going to blow some of the return, so try to be sensible about it. Then, you can feel good about your purchases and avoid buyer’s guilt later on.
- Start or add to your emergency fund. An emergency fund helps keep unexpected expenses from spiraling you into financial ruin. Kids all need new shoes (two months after you just bought the last pair). The refrigerator is on the fritz. Your union approved new health insurance with a $75 higher copay. Some jerk read ends you and totals your just paid-off car – you get the idea. All these bumpy financial events can be smoothed by an emergency fund, and a tax refund is a great way to pad your account.
- Pay down your debt. The number one best investment of your income tax dollars is in reducing your overall debt. Make extra payments on your mortgage or pay on the principal. Pay off your car loan early or place the money into an automatic draft account if you have trouble with late payments. Pay down your credit card debt. You’ll feel great after taking a large bite out of your debt value in one fell swoop.
- Plan ahead. It’s also a great idea to put aside money for medical expenses, retirement, or large future purchases like a wedding, home, or car. Start a college fund for yourself, your children, or your grandchildren and add to it every year when your income tax return arrives. Every little bit helps.
- Make a memory. Usually, we all have one special person in our life who we would love to do something nice for, but we never seem to have the money. Life is short, and your money is meant to be enjoyed. Knock out as many regrets as you can while you still have time by making an intentional effort to let others know how much you care. Take a weekend trip with a loved one, get your mom tickets to that ballet she’s always dreamed of seeing, or take your kids to Disney. Use part of your money to make memories and build relationships. What’s the point in having a fat bank account if there’s no one to celebrate with? You can find a nice balance between investing and saving for the future and enjoying the fruits of your labor now.
- Saving is always a wise choice. Even if you decide to set aside 10% of your return, 10% more is better than the status quo. A few dollars here and there can really add over time.
With this model, you can devote a total of 50% of your mini-windfall (10% to spending, emergency fund, planning for the future, memory making, and saving) and still be able to devote 50% to paying down your debt. While developing a tax return budget is an individual decision, this model allows for a good mixture of diversified spending to improve your overall financial health.