Best Ways to Use Your Tax Refund
Fair warning: if you were searching for spending ideas for your tax refund, then this post is not for you. That said, this post is about what you should do with your tax refund.
I hate to be the bearer of sad news but here it goes: your tax refund is a resource, not a bonus.
Yep, that’s right. The ideal scenario would be for you to break even come tax time. No money owed, no money owed to you either. The reason for this is that using the government as your personal savings account is risky business. Think about it. If, for any reason something went horribly wrong in the country and the government was unable to refund you, you’d be sore out of luck.
Of course, no one wants to owe back to the IRS either.
Unfortunately, many of us tend to go with the flow, instead of bothering with making changes in the W-2 paperwork. And so we get a refund.
This somewhat big influx of money however, should always be treated with the same respect as your paycheck. And that means, you should carefully plan how you will use it in the best way possible.
If you find yourself at a loss of how to best use that money, then here are some very good ideas. Ideas that will make the best of your money, and benefit you the most, even if you can’t see it immediately.
Best Ways to Use Your Tax Refund
This post is meant to be used a general guide, and not as professional advice. I am not an accountant. The opinions shared here are entirely my own. If you are in need of tax advice, contact an accountant in your area. For The Exceptionally Ordinary Life’s disclaimer policy, visit the Terms & Conditions page here.
Establish an emergency fund
It goes without saying that life is full of the unexpected. Whether in the form of happy coincidences, nice surprises, or plain old emergencies, we can count on something, anything to come up. Unfortunately, it is the emergencies that catch us most off guard. And the ones that tend to wreck havoc.
Having an emergency fund is that little cushion that allows you to have some peace of mind when an emergency happens. And do not be mistaken. An emergency will happen. It’s just how it works.
Pay off debt
Of all the things options that come to mind when thinking about spending your tax refund, paying off debt is the least attractive. I totally get it. If your refund is as handsome as ours usually is, then getting all that money at once feels like Christmas.
Except it’s not. But it could be a gift.
See, if you are constantly struggling to pay your bills, then you know that the worst thing is to have even more monthly payments due. Things like credit card debt, personal loans, medical bills, student loans, etc. are more than a problem. They are hindering.
If you use your tax refund to pay off at least some of it, then you will have more money leftover from your paycheck for other things. It’ll feel like lifting a huge weigh off your shoulders.
Create sinking funds
Things like car tags, oil changes, and property taxes come to mind. Having sinking funds for those unavoidable expenses is a must. Trust me, saving a few dollars a month for your car tags is a lot easier to do than forking out $55+ from one paycheck. Especially if you are already struggling to make ends meet.
While the ideal way to deal with this is by putting a bit of money aside from every paycheck, if you haven’t started this yet, then you could use your refund to get ahead. It might not be pretty, but it will give you a respite.
Catch up on past due bills
Past due bills could be a huge source of stress for anyone. I know this from personal experience. Growing up, my Mom and I had our fair share of encounters with this problem. My Mom was an amazing person, and a wonderful mom. But she sucked at managing our finances.
She had no budget, no savings, and no help from anyone. For all those reasons, and more, we were often behind on bills, causing service interruptions, and extra fines, and fees to get the service back. I am no doctor, and I am aware that my Mom didn’t necessarily take care of her health. But I can tell you this: I am positive that all those past due bills, and other financial hurdles contributed to her high blood pressure, and the heart attack that led to her her untimely death (she was only 51).
Cash flow repairs
Got a car that needs new brakes? Or your washer needs to be repaired or replaced ASAP? Then using at least a bit of your tax refund to cash flow those expenses is a must! It might be painful to see all that money leave your bank account, but it will save you tons of headaches.
Believe me, cash flowing those repairs beats putting them on credit every time. Nobody wants to make the banks or credit card companies any richer than they already are. And that’s exactly what you do when you put stuff on credit, thanks to interests.
Apply to mortgage principal
Full disclosure: I am not entirely sure that all banks allow this. But I know my Mother in Law has worked her mortgages like that in the past. If you have a mortgage, you should check with the lender for sure.
Applying that extra money to your principal means that the amount you actually owe them goes down. That’s not the same as simply paying your monthly due amount. In the beginning especially, most, if not all, of your monthly payment goes to interests. Interests are accrued on the amount owed, which means that if the principal (what you actually borrowed) goes down, so do your interests.
Total no-brainer. Considering more than 50% of Americans do not have enough saved to cover a $1,000 emergency, you know that saving that money is an excellent idea.
Once your emergency fund, sinking funds, etc. are taken care of, consider putting all the extra in a separate savings account. The money can then be saved for retirement, buying a house, college for your kids, or whatever you want. Just make sure that all the important stuff is covered first.
Within reason. Please, do yourself a favor, and do not just blow the money on things. Not even an experience, like Disneyland. I hate to be a Debbie Downer, but believe me when I tell you that if you are struggling financially, you should not do that. No amount of fun can ever make up for the huge amount of stress and anxiety that comes with money problems.
Instead, think of something that, while reasonable, would make your family very happy. A treat. Something that you usually can’t afford. Maybe a one night stay at the Great Wolf Lodge (trust me, one night is more than enough), if you have one nearby. It’s affordable as a treat with the extra cash and insanely fun. Or even painting your kids bedrooms in a color of their choice, and new bedding sets for everyone.
Those are all small things, but they can totally make a difference. And most importantly, they will be minimal and will not eat up your entire refund.
Best Ways to Use Your Tax Refund
If there is one thing, only one thing you should take away from this post, is that you should always think and be smart with how you use your money. When we don’t stop to think, and plan how to use our resources, we often make poor decisions.
I know how tempting it can be to just go ahead and spend all that money on frivolities. It could even feel like we deserve all these nice things, and experiences, right? In truth, there is one thing you should strive for, one thing you deserve for sure: peace.
Now tell me, do any of these ideas sound like solid ones for you? If not, what will you be doing with your tax refund? Please, share your plan in the comment section below. Inquiring minds want to know!