When it comes to tax refunds, I’ve heard a few things from folks over the years that have raised a few eyebrows. At least for me. While I tend to think in terms of saving and having future finances taken care of, some folks prefer to simply live for today and worry about tomorrow later.
This of course is related to the question of “what to do with a tax refund?” Now, whether or not you actually get a refund or not can depend on a few factors. To me, it helps to maximize chances of doing this by hiring a pro to do my taxes. But however you handle tax preparation, you just might end up with the need to figure out what you’re going to do with a refund. It’s a nice problem to have, compared to the alternative of having to pay an amount due when finishing your return.
Of course, a look at tax rates by country indicates that the U.S. may not be so highly burdened compared to many other countries – despite a lot of complaining and hand-wringing over annual tax filings. Regardless, if you’re fortunate enough to be getting a refund, there are a bunch of good things you can do with it. And, of course, other things that can be avoided.
Here are 5 Things to Do With Your Tax Refund:
Pay off Debt
If you’re getting money back, why not apply it to existing debt? Being in debt stinks, and can really hold people back from achieving life goals and having the quality of life one wants. Instead of paying interest on big balances, why not take a tax refund and make a dent in your debt? This particularly makes sense with higher-interest debt.
Save for Retirement
As we all should know, we can’t be sure that we’ll be able to work until old age. Thus, it’s important to take retirement planning seriously. Every little bit helps, and we just might be thankful later in life that we set aside some money from way back when as a younger person. Ultimately, when you retire may or may not be under your control, but you’re responsible for the quality of that retirement when it does happen.
Invest it
Investing money is an important part of personal financial planning. We can save money, as noted above, and that is of course vital. However, if we actually plan to invest money, we just might see this money grow to something quite a bit more significant. Rate of return is important, as we know. So, making a smart investment can be a great way, in many cases, to utilize a tax refund.
Enrich Your Kids’ Lives
By this, I don’t mean just handing them money! Rather, I mean spending it on their education or extracurriculars that can help them develop and grow as people. Investing in your kids can be a great way to put them in a little bit better position to succeed in life. Kids are a noble use of funds
Be Generous
Generosity can be a great thing, and there are certainly many ways one can show this. Of course, giving money or time can be very personal, and what works well for one person might not work as well for another. If it’s possible to give money – or preferable to time, anyway – a tax refund might be a viable source of funding.
As for What NOT to do with your tax refund, there is one thing that comes to mind: splurging. Now, of course life is to enjoy – and we should do so every day. Life is short. That being said, why not take care of actual needs first? When I have heard people talk about taking vacations with tax refunds, or buying TVs, etc – I just don’t get it. Maybe I need to lighten up about such things, and frankly I don’t judge people negatively who do splurge. It’s just that I prefer to apply funds to things I perceive as bigger needs.
My Questions for You
What have you done in the past with tax refunds?
Do you have any other suggestions or comments to add?
These are excellent! I’d add put it toward an emergency fund if you don’t have one. Also: If your refund is substantial, trot yourself down to the payroll department and submit a new W-4 to cause a bit less to be withheld from each paycheck. While you’re there, set up an automatic payroll deduction to send what you were sending to Uncle Sam directly to your own savings account. Otherwise it’s easy to spend it!
Kurt – yes, emergency funds are great to have. All it takes is one or two unexpected developments and people could be diving into their savings or going into debt.
When I got my tax refund, I did responsible things with it, except for about $100. I took that and had a little fun. In the long run, it won’t make much of a difference because the $100 from my tax refund just gives me the opportunity to take it out of my fun budget and save it, but it’s nice to have a balance.
Tushar – balance is great, I agree. Seems like you’re balancing in multiple ways, by using the $100 and then saving the same amount by taking it out of your fun budget!
To Kurt’s point, I wouldn’t assume that those of us getting tax refunds are withholding too much. I get money back mainly because of the expenses associated with renting out part of my house. In fact, for my 2012 taxes the losses associated with renting part of the house due to expenses not recovered equaled almost exactly my refund. There’s no way to plan for this, though, so I just leave my withholding alone.
I do spend my refund every year, though…on the house. With a 60+ year old house, there is always something that needs attention. Last year was particularly expensive since I updated the second floor bedrooms by replacing flooring, light fixtures, and painting. This year I’ll have the landscapers back to cut the edges of the beds and add new mulch. I may do some minor remodeling in my home office, too, and between those two projects the tax refund will be quickly used up.
Linda – older houses do need constant work, so that makes sense. I can appreciate that!
Ours goes largely into savings, allocated to cover: Home Repairs, New Car Savings, Car Repairs, Kids Pre-School and Activities, Vacations, and sometimes we’ll allocate a few bucks to splurging on something that we might want.
MB – sounds like you’ve thought this through. Home repairs are are an especially good choice, as many people underestimate their costs!
I am putting mine in my savings for now.
krantcents – makes sense!
I guess this sort of falls under investing, but if you don’t need additional liquidity, it’s often a good idea to use your refund to pursue personal projects that have a high rate of return. For example, insulating your house or getting a part-time master’s degree from a state school often have a high payback that’s probably better than your rate of return in the financial markets.
I spent half my refund this year on a much needed vacation to Hawaii and put the other half in my emergency fund. In the past they’ve basically just disappeared into my checking account and got spent over time, but I now see the value in designating larger chunks of money for a purpose. In the future I’ll just put them towards whichever part of my financial plan I’m working on, now that I actually have one.