It’s not every day that someone gives you hundreds, or maybe even thousands, of dollars for (seemingly) no reason. That’s what makes getting a tax return so exciting. However, it’s easy to get swept up in the excitement of the moment and spend it all right away without much thought. So before that much-anticipated check arrives, stop and consider what you should do with your tax refund, as well as what you want to do.
For a sensible compromise, you could try dividing your tax refund into three buckets: spending, savings and future goals. Here’s how:
Start an emergency fund
You’ve been saying for months that you should start an emergency fund, so why not take your tax return and do it? It doesn’t need to be a lot (actually though, it only takes $5 to open a savings account). But even a couple hundred dollars can go a long way toward covering unexpected expenses, like car repairs or healthcare costs. Over time, a good goal is to save enough, so that you could cover three months’ worth of living expenses. But Rome wasn’t built in a day and neither is an emergency fund. Just save as much as you can.
Treat yourself to something nice
As they say, treat yo’ self! You deserve it. Plus, the occasional well-deserved splurge can help you stay positive in your pursuit of long-term goals, like saving for a home or paying down debt. The key is to know how much you have to spend (about a third of your total tax return) and not go over your limit. One idea is to put it toward a special experience, like going to a concert or eating at a fancy restaurant. You could also put the money toward an upcoming purchase, such as plane tickets for a future trip. Spend it on anything you want, just so long as it’s something that makes you truly happy.
Put the rest toward future financial goals
We’d suggest putting the final piece of your tax refund toward your long-term goals. Whether it’s buying a home, saving for retirement or paying down debt, take this opportunity to shore-up your financial future (your future self will thank you!). Something you could do with your tax return is make a larger lump-sum payment on an outstanding loan or debt. When you pay off debt faster, you are receiving a guaranteed return on your money – the amount of interest you would otherwise be paying. Figure out how much you could save in the long run by using our lump sum payment calculator.
There’s no one right answer for how to spend your tax return. The most important thing to remember is to approach all financial decisions with a level head, always balancing wants and needs. The rest is up to you, and we know you’re more than capable.
But hey, if you ever need some extra guidance, you know where to find us.