Its tax season everyone- and I brought my hubby back for some of his financial knowledge. Filling your taxes is a given (and my hubby uses TurboTax to do ours and recommends it)- but what should you do with the tax refund?
Hey everyone- Handsome Hubby here again (but that’s just what my wife calls me- you can call me Jacob).
So, you’ve filed your taxes (or are in the process still) and received the pleasant news that you are getting money back. What a great feeling! It’s like finding money in your coat pocket. This is money that you hadn’t planned on, so it’s a great excuse to buy something you wouldn’t normally. But, in case there’s a responsible (read: boring!) part of you, you might consider doing some productive things to do with that money.
Don’t spend your tax refund just yet
The most important thing you need to remember, no matter what you do with the refund, is that you shouldn’t spend it until you actually get it. If you know it’s coming, don’t go buy a boat/computer/dress/insert-item-here before the money has hit your account. Why? Well, two reasons.
First, it’s a general budgeting best practice to not spend money that you don’t yet have. If you do that habitually, it will eventually get you into trouble. Unforeseen things happen and money falls through. If you’ve already spent money that doesn’t materialize, you are out of luck.
Second, it’s easy to double spend that money. You’ll buy something in advance but forget about that purchase as soon as the money comes in. Once it’s in your account you’ll again feel rich and have the impulse to go buy something.
Pay off your credit cards
If you are carrying a balance on your credit card, consider paying it down with your refund. This may not be the sexiest thing to do with your refund, but your credit card balance is being charged a high interest rate, which is really costing you. Pay off your high interest debt and try not to carry a balance moving forward.
Save some money
It’s a good idea to have a savings buffer in case of emergencies. Broken down cars, lost jobs, and medical problems are serious issues and can be catastrophic if you don’t have any savings. Start saving with your refund, or add it to your existing savings. There are lots of ways to save! One easy one that my wife and I use is Capital One 360. Easy to use online interface and great customer service. What more can you ask for?
Start a retirement account
The earlier you start saving for retirement, the better. A few years can make a huge difference. Consider starting an IRA or contributing to a 401(k) through your employer. This is a lot like the savings I suggested above, but with some tax benefits and a long term focus. If you don’t already have an account, I recommend Fidelity. They have lots of options and do a great job of explaining everything.
Start your business
Been thinking of starting a small business? My wife recently started selling greeting cards on Etsy (check them out here… she’s really good!). She’s wanted to do it for a long time and is happy that she finally gave it a go. The start up costs for a small business like this are small and will easily be covered by most refunds.
Have some fun
If you are a generally thrifty person, consider spending some (not all!) of your refund on something frivolous. As my wife has admonished me, it’s okay to loosen the purse strings a little bit from time to time.
My wife and I pull out a couple hundred or so from our tax refund and put it into a separate savings account in Capital One 360 that we can then easily move into our spending account connected to our debit card (if you remember me talking about that in my last financial post). We did this last year and used it to have an occasional fancy dinner or little shopping spree that didn’t fit within our standard monthly spending budget.
Adjust your withholding
If you got back a large tax refund, it means that you are withholding too much from your paycheck. What’s wrong with that? Well, it’s fine except that you are giving the government an interest free loan all year. It would be better for you to withhold less, and put that money into savings and earn some interest on it. You can set up your account to automatically transfer some money to savings each month. By the end of the year you’ll have more money in your savings account than your refund would have been.
Use an online calculator like this one from TurboTax to figure out how much you should be withholding.
So, there are a few tips for what to do with your refund. As exciting as it is to get money back, consider doing a few boring but beneficial things with it.
What are you planning to do with your refund? Let us know in the comments below!