By this time, you are most likely already in possession of your tax forms. Unless you have a very complicated return, the majority of tax forms are due January 31. When 62% of Americans have less than $1,000 in a savings account, it is no surprise that employees file their taxes as soon as they receive their W2 forms. According to CNN Money, eight of ten taxpayers receive a refund every year. If you are like me, you’ve gotten your IRS direct deposit into your bank account already. Isn’t an exciting feeling? Having all that extra cash…
As much as it is exciting, it is also tempting to waste it away on emotional and immediate gratification purchases. Turn on the TV and almost every other commercial suggests a way to spend that refund. Whether it is CarMax, Walmart or this TaxSlayer, they all encourage frivolous shopping. Even TurboTax, which I would expect to recommend more responsible spending, is all about fun. Oh yes, you’ve worked the entire year and you probably deserve some pampering but I would strongly suggest that we all stop and think before we go on a shopping spree.
So how should you really spend your tax refund money?
First, you should plan. Don’t wait till you receive your check or direct deposit to decide what you’ll do with the money. In the heat of the moment, your emotions will easily take over. Even the most disciplined persons have their limits. Make a list of items you should and would like to use the funds for. For example, you list may look like the one below:
- Pay down/off credit card
- Buy a new VR headset
- Buy a new phone
- Buy a new TV
- Put money towards savings
- Upgrade appliances
- Pay off debt
- Fix car
- Get new tires
- Shop new clothes
- Give to charities and ministries
- Visit new restaurants in town
- Replace water heater / AC unit
- Make necessary home repairs
- Take a continuing education class
- Buy a new video game
- Increase cable subscription
Does that list sound familiar? It probably does. There are certainly things in your life that you’ve planned to do, upgrade or fix and now you have the cash to do it. However, money may be available but the timing may not be appropriate.
Once you have your list, the next step is to prioritize. What’s on your list is the most important and time sensitive? If your AC unit needs repair or replacement, you should probably prioritize that over increase your cable subscription. If you have a medical bill that may be transferred to a collection company soon, I’d recommend paying it first over paying off your credit card balance. It’s all about priority! Personally, I always put the first portion of my tax refunds towards charitable giving and to tithing. Then, savings come second and finally debt. If there is room, a little bit of fun shopping may be included. By a rule of thumb, I recommend allocating between 20 and 30% to your savings. When deciding to pay off debt, choose what’s time sensitive first. Obviously, if you’ve missed payments on a loan, common sense says it might be best to tackle it immediately.
It is absolutely okay to do some shopping, have fun or take a vacation, IF you’re in the position to do so. If you’ve been diligent with your money and this refund comes as extra, why not have a bit of fun. Maybe you’ve wanted to visit a family member for a while. It may be time to get that pricey plane ticket. Guys, have you been eyeing a new gadget for the past few months? Those drones seem to be some very cool toys. Ladies, how about some pampering. As long as you’re not going overboard and spending the entirety of your refund without saving and and/or meeting your debt dues, you’re in good shape. My point is that financially stability does not mean locking yourself into a prison. It is simply making the right financial choices and decisions at the right time. In fact, when you have been financially disciplined, you will have so much more flexibility in how to spend YOUR money.
Remember that at the beginning of the year, you’ve set some goals. For those of us who had a financial goal, this refund could serve as a boost to the savings account. Why not use it wisely? To be a money-smart millennial, it’s starts here.