What Do I Do With My Tax Refund?
It’s tax time again and your probably asking where is my refund?.Even though a tax refund is your own money simply being returned back to you, it still feels good getting a nice fat check around tax time.
According to the IRS, the average tax refund check came in at $3,050.
So, what should we do with this nice tax refund windfall?
While the decision is entirely up to you, I’m going to give you some tips on what to do with your tax refund.
Fund Your Emergency Account
Before you spend your tax refund on anything else, you must first fully fund an emergency savings account! Unexpected events can happen to anyone and can happen at anytime. In fact, they always seem to happen, don’t they?
I can tell you from personal experience that having an emergency savings account has saved me countless times. I would have missed a mortgage payment and ruined my credit if I didn’t have money saved up for emergencies.
There’s plenty of emergencies that can happen to any one of us, such as:
- Car accident. If the accident was your fault, your insurance covers the other driver. But what about your car? Unless you have full coverage, the cost to repair your car is on you.
- Medical expense. Getting sick is a part of life. Whether it’s the flu or something else, there are extra costs involved. Imagine not going to work for a week or two? How will you make your rent or mortgage payment if you miss a paycheck?
- Job loss. If you got fired today. How long would it take to find another job? If the answer is 6 months, do you have 6 months worth of income saved up?
- Repair. Homes continually need repairs and upkeep. Anything can go wrong, from the water heater needing to be replaced to a leaky roof. And it always seems to happen at the most inopportune time.
- Miscellaneous. Ah yes, the dreaded miscellaneous. There’s an endless list of things that come up all the time that we don’t plan on it. Let me give you a few: how about dropping your phone in the toilet, your dog spraining their leg or a funeral you have to attend.
Just how much money do you need in an emergency savings account? In a good job market, 3-6 months of living expenses is enough. But if your skill is not in demand, be prepared to have 6-12 months saved up.
If you already have your emergency savings account fully funded, then you’re free to spend your tax refund on something else.
Pay Off Debt
There are not many things that hurt your financial situation more than high interest credit card debt. It should be your goal to pay off this debt as soon as possible.
If you are paying any interest on a credit card, this must be paid off before you spend your tax refund elsewhere.
Even if your debt is an interest-free loan from your friend or family gave you, pay this off with your tax refund.
Carrying a debt is like walking around with a weight on your shoulder. For the sake of your mental sanity, get this paid off.
Take A Vacation
Most personal finance blogs will tell you to save your money at all costs. But I’m here to tell you that life is for living, not for saving! So if you already have an emergency savings account and no debt – go ahead and take a vacation.
It’s important to reward yourself and your “wins”. If you have a fully funded emergency savings account and no debt – you deserve to treat yourself!
Fund Your Retirement Account
Nothing can give us more peace of mind than knowing our future is financially secure.
Odds are you are not fully maxing out your retirement account. For 2017, here are the retirement plan limits from the IRS. If you have a 401k account, you can put up to $18,000 in it. You can also open an IRA and fund that with the max amount of $5,500.
Improve Your Home
Nobody ever seems to have money to renovate their house. It seems like most people just fix things as they break. Well, how about doing some upkeep and preventative maintenance? How about making your home a nicer place to live?
This includes things like a new roof or landscaping to add value to your home. But you can also do energy efficient improvements which will lower your monthly utility bill and may also be tax deductible.
Give It To Charity
If you don’t have an urgent need for your tax refund money, consider donating it to charity. Not only can it be a tax deduction, but it will make you feel good inside.
Notice a pattern here so far? Each of the things I’ve listed so far are beneficial to both your mental and financial health.
Ideally you’ll want to get the smallest refund possible in order to get the benefit of that money throughout the year. Using a tax return estimator can be of great assistance to figure out how much taxes you expect to pay in the coming year.
When you get a tax refund, don’t treat it as free money. After all, it’s your own money the IRS is giving you back. Consider doing something with your refund that will have a long lasting effect on your wellbeing.
What do you do with your tax refund?