Tax Refunds: Spend, Save, or Invest?

I’ve seen several articles on tax refunds (specifically how to spend them) come across my desk lately. With the tax filing deadline a week away, that is not too surprising.

It IS surprising that none of the pieces say, “Take a look at your personal financial goals, and see which one you can make progress towards achieving.” Instead, most of them have some generic tips and advice, like pay down credit card debt or put it in your emergency savings account.

Both are good ways to use the money…but how would YOU decide between the two?

I don’t know your personal situation, but I suggest the following steps if you’re not sure where to begin:

  1. Pay Yourself First
  2. Open and Invest in an Emergency Fund
  3. Pay-off Debt (High Interest Rates)
  4. Open and Invest in a Roth IRA
  5. Pay-off Debt (Low Interest Rates)
  6. Save a Down-Payment for a Home (if necessary)

Spend?


Your tax refund is your money; you actually overpaid the government (actually, your company overpaid the government with your money).

So if you’re not yet paying yourself 10% of your pre-tax income, take some of your refund and spend it on whatever you want.

Seriously, if you constantly deprive yourself and don’t enjoy the fruits of your labor, your money will end up stressing you out and causing conflict.

Save?


Again, depending on your situation, your tax refund may go a long way in creating an emergency fund.

With savings account interest rates at less than 1% and credit card interest rates between 10% and 60%(!), it may be tempting to use the money elsewhere. Remember, your emergency fund is a safety net and should cover ALL your expenses (including mortgage and credit card payments) regardless of interest rate.

Invest?


If you’re all set on spending and comfortable with your emergency fund, investing your money is a great way to go.

By invest, I mean putting the money towards your Roth IRA, paying down debt, or reducing the amount of debt you need to make a purchase.

If you go through your goals, you’ll quickly see where the money is needed most and make the best decision for YOU!

As Jim Rohn once said,

“If you don’t design your own life plan, chances are you’ll fall into someone else’s. And guess what they have planned for you?
Not much.”

 

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