It is getting close to that time of year when all the places you shouldn’t be spending your tax refund will be hanging banners that say, “YOUR W-2 IS YOUR DOWN PAYMENT!” Scary. So other than to heed my advice and stay away from places like that, how should you go about using the tax refund that an estimated 55-65 of Americans will receive?
Bankrate.com did a survey of those who will receive a refund and got some pretty interesting results: 58% will either pay down debt or save their refund, while 26% will buy necessities. But I bet when the check really comes, those numbers won’t be very accurate. Why? Because having a big chunk of money in your hands without a concrete plan almost always equals choices that aren’t nearly as good as if you write down what you will do when the money arrives. So let’s talk about how to plan out the most effective way to use your tax refund (or any big chunk of money you might happen upon):
Make a Plan in Advance
As obvious as this sounds, don’t wait until the check arrives or the direct deposit occurs. As soon as you know how much you’re getting, sit down and carefully consider what to do with this money. If you owe money, make your plans for that too. Don’t ignore the IRS – I promise they won’t go away.
It is Your Money
Even though I’ll tell you what I think you should do with this money, remember that it is YOURS. If the IRS is giving you a refund, it means you worked hard all year and simply paid them too much of YOUR MONEY. They are nice enough to give it back (wow, never thought I’d say the IRS was nice…forgive me for that slip).
If you don’t already have something to shield you from an emergency, your first priority needs to be to set aside as an emergency fund. How much? At least the amount of one paycheck. Break the cycle of living paycheck-to-paycheck. Then, assuming you have consumer debt (meaning you’re a “normal” American), I have five steps I teach to knock out debt and get your financial life in order.
- Cut Expenses
- Maximize Income
- Get Current on Everything
- Use the Dave Ramsey Debt Snowball to Arrange Your Debts
- Make a Call Every Time You’re Ready to Pay Something Off
I provide details on each of these in my book, so you may want to check it out if you really want to make the most of this year’s refund.
One Last Thought
If you got a huge refund this year, you should reduce your withholdings to reduce this refund IF you can use the money throughout the year responsibly – if not, maybe the tax refund approach is necessary for now. But always be working toward the goal of avoiding paying the government too much of the money that belongs to you.