Spend It or Save It? What to do with your tax refund

by Wade Barnes 12. March 2012

Average Annual Tax Refund

It's that time of the year again, and if you haven’t already started working through the process of filing your taxes, now is the time.  While it likely isn’t the most favorite chore you’ll tackle this year, it might be one that pays off.  According to the IRS, the average tax refund this year is about $3,000.  Some might argue that getting a tax refund isn’t the best way to manage your money throughout the year, as you essentially gave the government an interest free loan.  Nonetheless, using your tax refund wisely can greatly benefit your financial position and might even help you get a bigger refund when you file your taxes next year.

Resist the urge to spend the money before it hits your bank account.  Most certainly avoid refund anticipation loans unless absolutely necessary to deal with an emergency, as these are expensive and might even leave you owing more money than you get back in your refund.  Consider having the money refunded via direct deposit from the IRS directly into your bank account.  Direct deposit isn’t only a safe way of receiving your money, it is also the quickest way of getting your refund from the IRS.

Once you know how much you can expect to receive in your tax refund, make a plan and consider spending the money in the following three categories to invest in your future.

Emergency Fund

Nobody wants to think that something bad might happen, but it’s always a possibility, and planning for an emergency in advance can help lessen the burden if it happens to occur.  Experts suggest you should have 3-6 months of salary tucked away in an emergency fund.  With this money in savings, you should be able to offset hardships that could come from illness, unemployment, or other unexpected events.  Another way to plan for an emergency is to stock up on nonperishable food items and household supplies that are not only good for natural disasters but can provide a source of stability if an unexpected event, such as job loss, was to occur.  While providing for an emergency isn’t a fun way of spending your tax refund, according to Maslow, by securing fundamental needs we can move on to talking about ways to maximize your full potential.

Invest in Yourself

There isn’t much in life more important than your future, so be sure to spend some money to ensure your future is strong.  Consider going back to school or taking a class that can help you learn new skills or techniques that will help advance your career and earning potential.  Attend a conference relevant to your industry – not only will you be exposed to cutting edge information, you’ll also be exposed to networking with people you may not have otherwise met.  Spend some money to update your professional wardrobe.  We all know first impressions are important, so be sure your professional attire is sharp.  Invest money in a retirement account.  Even if you love your job, the time will come when you want some time for yourself.  By investing in a retirement account, you can look ahead to life after work.

Tax Deductible Activities

Consult your tax advisor on this topic, but there are ways you can spend your tax refund that could potentially reduce your future tax burden.  Tackling home improvement projects like purchasing energy-efficient windows or doors, adding insulation, and installing energy-efficient appliances or solar panels are all good ways to improve your home and potentially lessen you tax burden.   Consider saving for or buying a house, as there are many tax benefits to being a homeowner.  Make a donation to your favorite charitable cause.  Not only will you feel good about making the donation, you’ll being doing good for the community.  Many self-investments that are career oriented might also help reduce your tax burden.  Again, consult a tax advisor to understand the details, but using your refund to improve your house, your retirement, or your community might mean less tax in the future.

While the above activities are all important, it is just as important that you treat yourself too.  Don’t blow it all on a weekend in Vegas, but make a smart plan to further your financial progress and after making smart investment decisions, do something to reward yourself as well.



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