It’s that time of year again. That’s right folks…tax return season is winding down. But as glorious as it might be to get a few hundred (maybe a few thousand?) dollars back from Uncle Sam, it’s uberimportant to analyze this scenario carefully.
First and foremost, getting a tax refund isn’t a windfall. This isn’t some stroke of luck where the government is giving you money. It was yours to begin with! Getting a tax refund is quite crazy if you think about it. A refund of $2,400 means you missed out on $200 a month that you could have put to use paying down debt or saving for retirement. Think of all those months over last year where $200 would have made a world of difference.
So, lesson number one is don’t blow this money! Make sure it’s used effectively. And lesson number two is adjust your W4 so that you start bringing home more money with each paycheck. Use this money in your monthly budget as opposed to sending it to a 0% savings account with the government. I also have my Top 5 ways to utilize your tax refund.
- Pay down debt. If you received a sizable return, put that money towards a debt. Maybe you have a credit card with a small balance that you could knock out. Or maybe it’s the washer and dryer you financed at Home Depot. Whatever it is, if you have a small debt that you can complete pay off, DO IT!!!
- Add to your emergency fund. If you don’t have 3 to 6 months of expenses in a savings account you could go this route. I recommend using a money market account at your bank or credit union for this purpose.
- Fund your Roth IRA. Putting a little extra money towards your future is always a smart choice.
- Save for upcoming expenses. Do you know that your car is going to need new tires before the winter? Do you have weddings or family reunions to attend this summer? Maybe last year you put a majority of your Christmas gift giving on credit cards and this year you want to avoid. Be prepared for short term expenses that you know of now by saving early.
- Save for kids college. If you haven’t already started a 529 account for your children, this would be an excellent idea. The window for saving for college is relatively small so the sooner you start saving the longer that money has time to grow.