If you have you filed your tax return for 2023 and are due for a refund, now’s the time to decide what to do with the money. When money comes into your life quickly, it can be very tempting to spend all of it. The Bible highlights this temptation in two proverbs.
“Wealth gained hastily will dwindle…”.
(Proverbs 13:11)
“ An inheritance gained hastily in the beginning will not be blessed in the end”.
(Proverbs 20:21)
While a tax refund is not an inheritance, the same caution applies. That’s why it’s helpful to decide what to do with your refund before you actually receive it.
Here are four very practical suggestions, and one that might surprise you.
- Build emergency savings. It’s old news that Americans are not the best savers in the world. Various studies point to a lack of preparedness for a financial emergency. One of the biggest financial emergencies you could experience is losing your job. If that happened to you tomorrow, how long could you cover your expenses with money that you have in savings? If the answer is, “Not very long,” consider putting some or all of your refund into a savings account. That may not sound very exciting, but maintaining a reserve of savings will do wonders for your ongoing peace of mind.
- Pay off debt. If you have accumulated some debt on a credit card and you carry a balance from month to month, putting refund money toward that debt will be a great investment. Think of it this way: if your card charges 18% interest, paying off some or all of that debt is the equivalent of getting an 18% return.
- Build big-ticket item replacement savings. What expensive items do you own that may need to be replaced in the near future? Your car? The roof on your house? These are the types of expenses that can make or break your ability to get ahead financially. Taking out a loan to cover those costs can hold you back. On the other hand, paying with money on hand can help you move forward.
- Invest for the future. Putting some of your refunds into an Individual Retirement Account (IRA) could make a significant difference in preparing for your later years. For example, if you’re 30 years old, put $1,000 into an IRA, and generate the stock market’s long-term average annual return of about 10%, that $1,000 will turn into more than $50,000 by the time you’re 70. That’s an amazing return on a $1,000 investment. Even better, if you put it in a Roth IRA, that money will be available to you tax-free.
- Make a memory. Here’s the suggestion you probably didn’t see coming. Especially if you have decided to put some of your refunds toward one of the practical purposes described above, feel free to use a portion for a special dinner or, depending on the size of the refund, even a trip.
Here’s the thinking behind this recommendation. So much of money management is psychological or emotional. In this situation, the temptation to spend your refund may be so great that trying to use all of it for practical purposes can backfire in the same way that a too-strict diet can backfire. So, planning to use some of the money just for fun can take the edge off the temptation to spend it all, giving you a better chance of putting most of it to practical use.
Having a plan for money you are due to receive — a plan that mixes practical uses with a little fun — will put the odds of success in your favor.
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