How To Spend Your Tax Return Wisely

How To Spend My Tax Refund?

If you’re getting a refund this year you may be asking yourself this very question.

Regardless of political persuasion and view of the tax policies of any past or current administration, many households overpay income taxes throughout the year and receive the over-payment back in the spring as a tax refund.

Should I Pay Down Debt With My Tax Refund?

The question arises every year. “Should I use my tax refund to pay down debts, jump start my emergency savings fund, or have some fun?” The rest of the year, this question comes in a similar form. “What should I do first, save for emergencies, invest for retirement, or pay down my debts?”

Fortunately, neither need be an either/or scenario. You can do several or all of the above.

Use the Tax Refund Calculator to help you determine what do to with your tax refund this year. The Tax Refund formula allows for a little bit of everything while keeping priorities and critical financial behavior top-of-mind.

Use our formula for using your taxes and get ahead with your finances.

Use our formula for using your taxes and get ahead with your finances.

The Tax Refund Formula

Regardless of the size of your refund, consider breaking it down for use as follows:

30% for spending on needs

25% for paying down debts

20% for savings

15% for long-term investments

10% for fun

This well-rounded approach to maximizing your tax refund provides you with the satisfaction of taking care of some critically important expenses while also enjoying it as well. The main barrier to using the Tax Refund calculator arises long before you even do your taxes, especially if you have received tax refunds in the past. You must commit to the tax refund formula long beforehand. Otherwise, the refund will be gone in a flash to the most enjoyable or satisfying expense in your household.

THE 30%

Spending on needs involves identifying important belongings in need of repair or replacement in order for your household to continue functioning smoothly. If the dryer is dying and beyond repair, use 30% of your refund to acquire a new one. A $1,000 tax refund means you will have $300 for a new dryer or a well cared for used dryer. A $3,000 tax refund means you will have $900 for taking care of your needs, perhaps adding a new couch for the living room or bed for the kids’ room.

Common needs you can use the 30% for include:

  1. Appliances

  2. Furniture

  3. Vehicle repair

  4. Work clothing

  5. Home business investment

THE 25%

Use 25% of your tax refund to pay down your debts. If you want to save the most money in interest over time, focus the 25% on your debts with the highest interest rate. If you want to build or rebuild your credit, apply the 25% toward your newest debt. If you want to feel like you are making the most progress, you might consider paying down or off the lowest balance debts first.

THE 20%

Saving for emergencies and short-term goals should always take priority in your finances. Add 20% of your tax refund to an emergency savings fund and then to short-term goals that can include:

  1. Vehicle repair or replacement

  2. Home repairs

  3. Birthday or Christmas gift giving

  4. Travel or vacation

THE 15%

Adding 15% of your tax refund to your 401(k) or IRA is not only a good idea for taking care of your future self, it may also help you save on taxes again next year. Depending upon which type of retirement account you have, your 15% contribution may lower next year’s tax bill or grow tax-free thereafter. Moreover, if your employer will match some of that contribution to a 401(k), you have just exponentially increased the power of this 15%.

Additionally, you might consider using your 15% to fund or boost your child’s college savings 529 account or put it aside as part of a down payment on your next home.

THE 10%

Last and certainly not least, you must remember to have some fun with your tax refund. Even if you must reduce your fun percentage down to 5% or even 2%, allowing yourself some recreation or pleasure will provide you additional motivation to stick with the rest of the goals. Here are some fun ideas for your 10%:

  1. Weekend trip or stay-cation

  2. Nice dinner and movie night

  3. New gaming console or accessories

  4. Outdoor gear and equipment

Your imagination is your only limit.

THE TAX REFUND CALCULATOR

Of course, you should consider customizing the tax refund calculator to your personal and household circumstances. If you have a couch to replace, a car to repair, and a refrigerator to replace, you will likely want to increase your 30% base to 50% or more. Whatever you do, use part of your refund for each of the layers, even if you have to cut one or more of them to 5%.

The usefulness of the Tax Refund Calculator does not end at tax time. Throughout the year, consider using it for other amounts of periodic income you might receive, including birthday gifts, unexpected back child support, or income from side gigs or odd jobs.