5 Ways to Spend Your Income Tax Refund
Are you part of the American tax-filing majority who's about to get a big, fat tax refund? If so, I have a question: What are you going to buy yourself with it?
What? A CERTIFIED FINANCIAL PLANNER™ is asking how you plan to spend your tax refund instead of telling you to pay off debt with it, save it or invest it? And he's not saying it's a financial mistake to get a refund in the first place? That you should change your withholding so you keep more of the money in your paycheck rather than receive a refund?
Well, before you get carried away with such thoughts, you should know I do believe all of those things I hadn't yet said. Of course, I'm going to tell you to be financially responsible with your tax refund. After all, that's my job. But in addition to being a professional financial planner, I'm also human. So I get it. The urge to buy something nice with a little extra cash is just as real for me as it is for you.
So, with a financial planner's brain and a human being's heart, I'd like to share my top five tips for what to do with a tax refund.
- Buy yourself something nice! You know you were going to do it anyway, so telling you to take all of your money and be financially prudent with it probably won't help you much! Plus, I really do believe that treating yourself to something special is a good strategy — just don't overdo it! Pick a percentage to use (maybe 10-15% of the refund amount?) and have some fun with it. Then, be responsible with the rest.
- Create or shore up your emergency fund. Do you ever feel like you're living paycheck to paycheck, or that your cash reserves are always uncomfortably low? Well, getting an influx of cash is a great way to fix that. Typically, I recommend having an emergency fund of three to six months' worth of your committed expenses. Set this aside in an account that's separate from the one you use for your day-to-day finances and bill paying.
- Pay off consumer debt. If you are among the millions of Americans with credit card debt, this could be a good opportunity to clean the slate (or at least part of it). If you have multiple cards and can't pay them all off, consider paying off the smaller balances first to give you a sense of accomplishment.
- Create cash pools for upcoming expenses. My family has many things on which we know we will spend money each year -- vacations, sports, gifts, travel, etc. If you have similar known expenses approaching, why not set aside pools of cash specifically earmarked for these purposes? This way, your cash flow won't be as stretched when the time arrives. It's important to separate this cash from your emergency fund since these things aren't emergencies and, as a designated pool of funds, you'll be more likely to stick to your planned spending amounts. I personally set up separate savings accounts specifically designated for such things, and it works great.
- Jump-start a savings program. Do you have a savings goal you've been meaning to start, but just couldn't get excited about putting away a small amount of money toward it each month? Dropping a lump sum into such a plan often makes it easier to get over the initial hurdle of getting started.
Create Your Own Financial Security
If you're about to get a substantial income tax refund, I encourage you to make the most of the opportunity. Are you just going to buy yourself something nice? Or are you going to buy yourself a future, too? Why not try a little bit of both?
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