Monday, January 30, 2012

8 Smart Ways to Spend Your Tax Refund

Photo credit: LeoSynapse
Yep - it's that time of year. Some people are itching to do their taxes, wanting the refund they deserve. Others are more cautious, either not knowing the outcome of their tax form calculations, or knowing they will be sending a check to the beloved IRS.

Some people will argue the ins and outs of whether you should try to get a refund each year or try to balance it as to not loan the government money interest free.

I get it. But we're not going to have that argument here and now. Right now we're just going to discuss what to do with the money that some of us will be getting back (I will!).
  1. Start or Bolster an Emergency Fund:  If you don't have any type of emergency fund, this should be the first step you take with this money.  How much to put into your beginning emergency fund is up to you.  I am a follower of Dave Ramsey's teachings, so I'd say $1000 if you have debt (to cover  small emergencies) or 4-6 months of spending if you have no debt.  This would be a great place to use this windfall. 
  2. Pay Down Debt:  If you are covered on the beginning emergency fund, throw that bad boy at your debt. It's a great way to make a big stride in paying down debt. There's nothing like seeing a much smaller balance after that check is sent. Successes like this one can motivate you on for months more.
  3. Save for Retirement:  What a great way to go ahead and toss some money at your Roth IRA.  You might be able to cover all of your annual contribution allowance if your refund is enough. What a peace of mind this would give you to already have this covered!
  4. Children's Education: Look into socking this away into an education fund for your children.  There are a number of different way to do this and since I'm not a financial advisor, I will not tell you the best way to do it.  There are plenty of people out there that can help you though, and this is a conversation worth having. 
  5. Fund a Purchase: If you've been fighting the uphill battle of debt or if you've been looking for a way to live on cash alone, this money might be just what you need to afford something you've been hoping for. Whether it is a good used car that will allow you to get out from under a new car payment (and the accompanying new car insurance) or some furniture that your house actually needs, using cash will not only give you the freedom of paying without credit card interest, but you might likely be able to swing a better deal if you can pay cash upfront!
  6. Donate it:  If you are blessed enough to not have anywhere in particular that you need to put this, why not bless someone else with it?  Give it to your favorite local charity or sponsor someone on a mission trip.  Not only will you have the joy of helping someone else with this money, but you'll be able to count it as a deduction next year!
  7. Go on a Mission Trip Yourself: If you have the drive to help others but can't typically shell out the money needed for a trip, use your tax refund and sign up through your church for a trip to - well, wherever they are going. You will get some hands-on experience of serving others, but you might just change a life or two (including your own!). 
  8. Splurge: This is the last way you could spend your money, but ONLY if you are in a good place in all of the above items. I don't mean that you feel okay about spending when you have debt.  I mean you have no debt, you have a full emergency fund, you live within your means, you have nothing that needs to be purchased with cash and you feel good about your giving.  Then - and only then - should you buy that next larger TV, or that new laptop, or that family vacation.  Yep - make sure you are financially secure before splurging.  But once you are, SPEND AWAY!  It's your money! =) 
What will you be doing with your tax refund?  Are you having to pay in instead? 

2 comments:

  1. Great suggestions! Are you a Dave Ramsey fan by any chance? :)

    We do get a refund, we try to get as much each MONTH as we can instead of a big refund, but still, with tax credits and things we end up getting money back (good!).

    This year that money is going straight to our emergency fund in order to work to getting it back up to 3-6mos living expenses.

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  2. Huge Dave Ramsey fan. We're in the middle of our Total Money Makeover. It's been a slow go because every time we make some headway, it seems that Murphy visits us. But we haven't given up yet and I know it will be worth it in the end.

    Great job being in a place to have a good emergency fund on your side!

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