Tax season is upon us. If you haven’t yet received your tax forms, you will be getting them soon. Getting a refund is exciting, but many treat it as though they won some sort of prize. Some decide to go and spend their refund on a big vacation or on a new entertainment system, but are those really their best options? Tax refunds are somewhat unplanned amounts of cash coming back into your bank account. Turning them into investments for the future or paying down debt are great ways to better your financial future.
My fiancé and I recently received our W2 forms from our employers and filled out our information online. We found out we were both going to receive a nice refund. Our taxes are filed separately as we are not married yet, but our finances are already combined. How we spend our refunds individually will affect the both of us. So we asked ourselves, what is the most beneficial way to spend our refunds?
I would be getting a $1600 refund. I didn’t know whether to be excited because of the large lump sum or disappointed because I could have used that money throughout the year. Without anything that I need at the moment, I decided I could either invest the money or pay off some debts. I still owe my fiancé’s mom some money for a loan she gave me a year ago. I decided that this would be the best use of my money. Paying off debts is a good feeling because it brings me (and my fiancé) one step closer to being completely financially free.
My Fiancé’s Refund
My fiancé found out that her refund would be nearly $1400. This was due to her claiming no exemptions and her new job over-withholding on her paychecks. Paying off her student loans has been a point of emphasis for the both of us since we graduated from college and found employment. A large chunk of our income every month goes towards paying down the loans. We hope to have them completely paid off in a few years, while still having enough money saved up to put a down payment on a house. Her financial freedom from her loans is very directly tied to our financial freedom as a couple, which means that making an overpayment on her loans with her tax refund would be the best option. With the interest rates on the loans being much higher than any safe investment, this is the best way the money could be spent financially anyway. At a 6.8% yearly rate, the $1400 payment will save us over $300 in interest over the next three years — an investment worth making.
What Will You Do?
Using your tax refund to buy something extravagant and unnecessary is financial irresponsible. Proper planning is imperative when it comes to tax refunds. Weigh all of your options before deciding what to do with your money. Maybe your family really needs a new television or a vacation, but making a quick decision could lead to future problems.
How will your refund help you reach your goals sooner?