For any of you who were lucky enough to receive a tax refund this year, you probably did a little happy dance the day that electronic deposit hit your bank account. I know I did! Last year having owed money (and the year before…) I forgot what it’s like to have an extra wad of cash magically appear in my checking account. Then the question hits you… What do I do with my tax refund?
There are many different things you can do with a tax refund, but I wanted to offer my advice for any readers out there weighing their options. This is just my opinion, take it with a grain of salt! Regardless of how you spend your tax refund I encourage you to take a few days and THINK on it before you spend! You’ll thank yourself later!
What to do with your Tax Refund
- Pay off any unpaid bills. Sorry but in my world, this comes first. I’m lucky enough at this point in my life that I do not have debt. I currently own my car, pay off my credit card and other bills in full when due, and owe no money on student loans. I realize that for our generation I am by no means the norm. So many 20 and 30 somethings are buried in student loans, and that leads to a struggle to pay other bills. So when you get a bit of extra cash what should you do? Honestly it only hurts you when you earn interest on things like credit card debt. Putting your tax refund in a savings account (or even worse, spending it) when you have high-interest debt is like borrowing money from yourself. Bite the bullet and use your tax refund to pay off whatever bill has the highest interest rate, or make an extra payment on your student loans (check first with your loan servicer to make sure they allow this). You’ll thank yourself later.
- Make a contribution to a retirement account. Do you have a Roth IRA? If you do – good. If you don’t – What are you waiting for? Mark my words our generation is going to have to fend for itself during retirement (which probably will be at age 80 by the time we retire). The earlier you start contributing to a retirement account the more you’ll earn back on it. As a rough rule you should be putting 10% of your salary in a retirement account (in 2015 you can contribute up to $5,500 to a Roth IRA). Think about how much you contributed this year and if it isn’t 10% consider adding your tax refund to the account.
- Bulk up your savings account (a.k.a. the emergency fund). OK so you’ve paid towards any unpaid bills and you’ve set aside some funds for savings. Maybe now it’s time to splurge a little. A little! I know I sound like absolutely no fun at all, but I have never been the type of person to take all of my money and buy something huge. If I get $100 for my birthday from a grandparent, I usually spend about half and put the other portion in savings. It’s just the way I’ve always been! First and foremost – you never know when you are going to need that emergency fund. It isn’t going to build itself. Secondly, the money you build up in savings allows you to buy the stuff you want. Like when you need a new car or want that fancy dishwasher for your kitchen upgrade. Or when you have a once-in-a-lifetime interview on your calendar and you really need a great suit to impress. By transferring money to your savings you are buying exactly what you want! You are just saving the money until you actually need that item.
- Invest in your life. This may sound strange, but my meaning is simple. What have you been holding off on doing that will make your quality of life better? Maybe it’s home repairs (which will ultimately improve the value of your house), expensive dental work (improve your health), or take a career seminar you haven’t wanted to pay for (improve your career/job outlook). Don’t just spend the money on any frivolous item – invest the money in something that will give you a return in your quality of life.
- Splurge… a little. So you heard my little ‘spend some save some’ rule for birthday checks. The first part of that rule was spend! So by all means take a little chunk of your tax refund and by something you’ve been coveting. For me this year it was a Triangl bikini. A lavish and unnecessary expense by anyone’s standards ($100 for a bikini? What was I thinking!). But it was about 1/8 of my refund. The rest went to savings (half to a Roth half to an online savings account). I got the best of all worlds – I saved my refund for a rainy day but I also got to feel as though I splurged on a much lusted after item.