From the waving tax mascots on the side of the road to the endless HR Block radio ads, everywhere you look there is a blaring reminder that it is tax time. For some, tax refunds are a joyous time, while for others, it means another financial burden added to your load. If you are lucky enough to get a tax refund, you may be wondering what you should do with it. Having a game plan for your refund can prevent you from spending your refund foolishly.
It’s Not Free Money
Before we start on your tax refund game plan, let’s talk about what you should not do with your refund first. The most important thing to remember is that tax refunds are not just free money. You have to remember that you worked hard for that refund and that it should be considered part of your income, even though the IRS says that it is not taxed like income.
You should also not just leave the refund in your checking account, leaving it to chance. There may be a few people out there with the discipline not to spend it, but let’s be honest. If we put a few thousand dollars in our main checking account, a few months later we will be scratching our heads wondering where it went. Keeping excess money in your main checking account can lull you into a false security. There is a short distance from, “Hey, I have a little extra money, why not go out to eat tonight,” to “Where did all that refund go?”.
So What Should You Do With Your Refund?
The short answer is to delegate every single dollar of it. Give each cent a job. Now for the longer answer…
In my personal opinion, there is no right number of what percentage of your tax refund should go to savings, debt repayment, and fun spending. The right number depends on the person. However, I am a firm believer that your tax refund should line up perfectly with your yearly goals/resolutions.
Hold Up, I Don’t Have Any Goals or Resolutions!
I know many people boycott making New Year’s resolutions because they are tired of never changing. However, not setting financial and personal goals for yourself will lead you nowhere. If you set the target for nothing, you will hit it every time!
Starting today, write down ten concrete goals that you will accomplish by the end of the year. Here are a few of mine just to give you an idea:
- 1. Pay off all debt besides Kia and House (Around $8K of debt)
- 2. Put $5K in savings account
- 3. Finish writing book and pitch it to agents.
- 4. Walk 1 mile every day
Of course, your goals are going to look different. I really want to be debt-free, lose 40 lbs, and have a published book. Therefore, I set the goals I knew would help accomplish those things. Knowing your concrete financial goals makes it simple to delegate where each dollar of your tax refund goes.
Now That You Have Goals, Let’s Move On
Like I said before, the best way to spend your tax refund should be in direct relation to your goals, financial goals or not. This means that I am going to use my tax refund to pay a good chunk of my debt off, put some in my savings, and use a small amount of money to buy books on writing and writing book proposals. Spending my whole refund on a luxurious vacation and massage is quite tempting, but a week in paradise will not get me closer to all of my yearly goals. Furthermore, treating myself to a shopping spree or a nice dinner will also not get me closer to my goals.
So what should you spend your refund on? The answer depends on your goals. Once you have clarified your goals, then you can delegate a certain percentage of your refund to each goal. Yes, treating yourself would be more pleasurable in the moment, but accomplishing goals you set for yourself is far more rewarding.
So how will you use your tax refund to help reach your financial and personal goals this year?