It’s that time of the year again where we file our tax returns and hope for the best. Almost 96 million Americans got a tax refund in 2019 with an average refund of $2,725. The tax preparer companies always promise they can get you the largest refund. Whether that is true or not, if you are one of those 96 million who get a refund, here are some ways that you can put your tax refund to work.
Cash Flow Your Budget
If you are budgeting every month but still feel like you are living paycheck to paycheck, you probably aren’t cash flowing your budget. Use your tax refund and keep a cushion in your account.
Save for Large Upcoming Expenses
If you have some known upcoming expenses in the next few months, use your tax refund to save for them. A cruise or some other vacation is not included here. If you think your vehicle has six months left on it, then save this money for your next vehicle. Pay with cash. If you have a wedding coming up, use your tax refund to pay for your wedding. This is the time to fund all your large expenses that you know you will have in the coming months.
Current Baby Step
If you don’t have your $1000 emergency fund saved, now is the time! Use that tax refund to get baby step 1 complete. If you are paying off your debt, use that money to pay off your debt. Just apply it to your smallest debt and work your way through them.
If you don’t have debt, then save your refund for your emergency fund. If you are on steps 4, 5, and 6, take 15% of that refund and put it in an IRA. Save some of it for your kids’ college if that applies and put the rest toward your house payment. If you are on these wealth building steps, it is ok to go have some extra fun with the money. Review your goals to make sure you are on track. If you are, then use this money for some extra fun.
After you apply your tax refund where it should go, you need to look at adjusting your W-4. See if you can adjust your W-4 to get it closer to a zero dollar refund. You are leaving money at the IRS which is not helping you—you are paying interest on your debt or losing investment income!
Too many people think getting a tax refund means they struck gold. Don’t use this money to go on a cruise if you aren’t in a financial position to. If your debt is paid off and you have your 3-6 months emergency fund in place, then take a trip if you want. Have some fun if you are on track to reach your goals. If you have debt, now is not the time to get distracted. Stay focused on paying off your debt. All available money should be going to your debt.