If you are one of the lucky ones, you will be getting a tax refund this year. Let me rephrase that, it is lucky if you don’t have to pay additional taxes. But getting a large refund really means that you let the government use your money interest free all year. So if you do get a large refund every year, you probably need to adjust your withholding so that you can invest that money yourself instead of giving it to the government and then getting it back.
But if you are getting a refund, it can be pretty exciting. But before you spend it, think really hard about what your best options are for utilizing that money in the best way possible.
If you haven’t accumulated an emergency fund yet, do that first. This cash is so important to use for the little emergencies that inevitably come up. Repairing a washing machine or car, or replacing tires, etc. These types of events can derail a budget if you aren’t prepared for them, causing you to charge something on a credit card again. And at some point in time you are going to have something break down.
If you are paying off debt, throwing a chunk of money on what you owe all at once can make a big difference in how long it will take you to be financially free. This also gives you a big emotional boost that helps keep you motivated to stay on your debt reduction track. If you accumulated debt over the holidays, get rid of it with your refund. I always advise to pay off your past purchases before considering new ones. Or use it to reduce the balance of your car loan or mortgage.
If you have your debts paid, put that money into your long term emergency fund. This is the money that you will live off of if you lose your job or can’t work for an extended time. Or you can put that money into your retirement fund. Time is on your side when investing money, so the sooner you put that money in a savings the better.
Although it’s really tempting to take a large sum of money and do something fun with it, take some time to decide what you really should do with it. Most people don’t usually get a lot of little windfalls like a tax refund, and if you blow it, you’ll regret it later. If you use it wisely, it can be a blessing that will jump start your debt reduction or retirement savings in a way that can be difficult to do otherwise. And then go back and change your withholding…