Spend a Tax Refund the Smart Way

The average American receives approximately $3,000 each year from their tax refund! While this is an exciting time to reap the benefits of a year’s worth of hard work, just how will you spend a tax refund to get the most out of it?

Identifying your own personal finances is crucial when allocating funds as you spend a tax refund. What best describes the way your current financial situation is set? Knowing this is best when assessing your situation from the ground up. Not everyone knows how to spend a tax refund wisely. Even tax websites like TurboTax provide a few helpful points. It’s best to understand the difference from the benefits of both smaller and large refund amounts.

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Looking At Receiving A Larger Refund?

While many of the following comments are commonplace, there are some individuals who do not know arguments for and against particular sizes of refunds. Some of those statements include the following:

  1. You’re giving an interest-free loan to the government
    1. While this could be accurate for many people, it’s lacking in the substance to make an exceptionally persuasive argument for excess money provided to the government when you pay your taxes.
  2. You’re cheating yourself out of cash flow
    1. When you receive a refund at the end of the year it’s because you have held excess money from a paycheck. This excess could be helpful in day to day life, making this argument quite valid. This could be the sole reason you are utilizing credit more frequently. While the merit is there it does not always apply to every situation.
  3. That money could be invested at a higher rate of return
    1. This is the most agreeable argument regarding not providing excess funds each paycheck for your taxes. Applying this money to a savings account allows you to have a return on your own money!

Those individuals who receive a large tax return at the end of the year typically are psychologically forcing a “savings account” on themselves. This self-imposed form of savings may be the only way for some to begin saving, as opposed to figuring how to properly allocate funding. For those of you who are receiving a refund, we’re here to help you spend a tax refund in a beneficial manner.

Spend A Tax Refund The Right Way

Too many people do not know the basics of how to spend a tax refund prior to receiving it. The following are tips and tricks to help you properly allocate funding from your tax refund.

1.    Do Not Spend Anything Until The Money Has Arrived In Your Account.

Charging items to your credit card, promising to spend the money with another, or even placing a deposit down and promising the rest when the return comes in are all ideas we would strongly advise against. Anything can happen. Expecting the unexpected is crucial for financial success when you spend a tax refund.

2.    Do Not Go On A Spending Spree Right After The Money Has Been Received.

With a large sum of money you could be tempted to splurge on unnecessary things. Prioritize your potential purchases into needs and wants to properly spend a tax refund without wasting any funds.

3.    Make A Budget Or Spending Plan Regarding Your Funds.

Use your already available budget to visually see your expenses, debts, and excess income. You will get the best overall picture of how to spend a tax refund when you can see the items listed out in front of you. It will put things into perspective.

4.    Apply The Refund To A Debt.

If you have any outstanding debts, use your refund to pay them off. This is one less item you will have to worry about in the long run. These types of items can prevent you from homeownership or even getting certain jobs!

5.    Build Your Savings.

Using your refund as a way of getting a leg up in your savings is also a wise way to spend a tax refund. This is a great way to secure your future in case of major life events such as a marriage, having a child, or just securing your financial independence.

6.    Buy Things That Save Money And Make Money.

If you find yourself in a position to do so, purchase things that will save you money. Whether this is upgrade your home to reduce energy costs, buying bulk nonperishable items, or even finding an alternative way to save on fuel costs such as a bike the options are endless to save!

On the flip side, encourage yourself to think of other ways to receive a return on an investment. If you put this toward your own education, a trip, or something beneficial to yourself you could find it may not be a monetary return but one based on experience which is just as valuable.

7.    Invest It!

Possibly one of the best ways to spend a tax refund is by investment. Whether you choose a savings bond, fixed rate money market account, high yield savings, or another form of investment you can see a substantial return on your investment and quickly!

8.    Make Life Easier.

This is similar to sprucing up your home. Purchase things that make y our day to day life easier; this could be new laundry baskets for a stay at home mom or tools for a mechanic. Be sure to invest in yourself and the overall simplicity of your life. It’s a great way to spend a tax refund!

9.    Take A Portion For Something Nice.

Of course you shouldn’t have to spend all of your money just improving your life, spend it on some experiences as well! A great rule of thumb when you spend a tax refund is to take 5% and do with it what you will. Whether this is going out to a nice dinner with family, shopping for some new clothing, or even getting that new cell phone you have had you eye on will give you a sense of pride in your ability to both spend and save.

Conclusion

There are a variety of ways to spend a tax refund wisely. Whether in the beginning or expert stages of financial planning a little advice will go a long way, motivating one to obtain even greater financial success.