We’ve all been guilty of it – we get a big tax refund check and run out to buy that big-screen plasma television we’ve been wanting, or take a trip to Mexico, or that new sofa you’ve been dreaming of adding to your sun room.
Spending your tax refund check this way is one of the worst things you can do.
The first thing you need to understand is that your tax return is, in fact, your money to begin with! It’s not some gift from the government; rather, it’s money that you overpaid to the government over the course of the previous calendar year.
If you consistently receive a hefty tax return each year, then you are doing nothing more than giving the federal government an interest-free loan on your money. There is no reason to do that. The solution? Adjust your federal income tax withholding so that you neither owe, nor receive a substantial amount of money come tax time each year.
But if you do end up getting a big refund check, here are 3 simple yet financially sound ways to spend it.
1. Eliminate Credit Card Debt – First and foremost, if you are in any sort of credit card debt, pay it off! When you’re paying interest fees for any credit card, you’re just giving away your hard-earned money. Forego any other temptation with your tax return until you have completely eliminated credit card debt from your life. Once you’ve done that, stay away from credit card debt altogether. There is a simple rule to follow – if you can’t afford to pay it off by the end of the month, then you need to drastically reduce your spending habits.
2. Invest 75% – If you don’t carry a credit card balance, consider the following formula: Each year, commit to investing 75% of your tax return check. The investment products you choose are up to you. You can utilize a Roth IRA or a traditional IRA as you work to save for retirement, or you can build up an emergency fund to protect you against unforeseen events that come your way. You can also choose to invest a portion of your tax refund money in some of the riskier investment options like investing in the stock market or trading financial derivatives. Whatever you choose, the important thing is they help stabilize your future income rather than fulfill any short-term temptations.
3. Spend 25% on Yourself – If you’ve led a financially stable life over the course of the past year, there is nothing wrong with spending some of it on yourself or on projects that have been tossed to the side. Exactly how you spend it is up to you, but rewarding yourself from time to time with small splurges during your financial life is pertinent to your overall success. Indulge yourself if you want, but just make sure you do it after you’ve invested the first 75%.
If you do get a large refund, by all means enjoy some of it. Simply put, prioritize your debts and your future income before spending the remainder on any short-term purchases. Your tax return should be used as one of your many tools towards achieving a fiscally responsible lifestyle. Use it to your advantage! Then, as you get out debt and invest more and more, you can begin rewarding yourself.
How are you going to spend your tax return money this year? Do you have any other tips that have worked for you? Please share your comments below.