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What to do with a large tax refund

what to do with a large tax refundYour 2016 tax return is due April 18, and by now, many of you have already finished filing your returns.  Why wait til the last minute, especially if you’re expecting a refund?  Let’s say you’re getting a decent amount of money back (more than enough to buy you a meal at a casual restaurant).  What are you going to do with your large tax refund?

First and foremost, pay down those high interest debts, especially consumer debts like credit card balances.  Even if your large tax refund won’t pay off your entire credit card debt, you can make a dent in the total amount owed and reduce the amount of interest you’re paying every month.  And don’t wait until your next statement arrives to make the payment.  Make that payment now.  Interest accumulates daily, so the sooner you pay down the debt, the less you’ll ultimately owe.

How does your emergency fund look?  Do you have money set aside for an emergency such as a house or car repair or an unexpected medical expense?   Different experts have different opinions of how much money you should have set aside.  I’ve read anywhere from 3-9 months of expenses.  Let’s be honest, how many of us have an emergency fund big enough for 9 months of expenses?  But your large tax refund can be used (even if just partially) to build up that emergency fund.  Maybe make a point to put half of your refund into your emergency fund.  Increasing the fund never hurts.

Are there repairs you have been putting off?  Does your car need new tires?  Do you need to replace some of the windows on your house (like I do)?  Do you have some landscaping work that needs to be done? Now’s the time, if your tax refund is big enough.

But none of these things are fun!  You want to be like your friends or coworkers and spend your tax refund on something awesome, like a trip or some expensive electronics equipment or a shopping spree at the mall.  And there’s nothing wrong with that option.  I would caution you against spending your entire refund, and if you have credit card debt, maybe spend very little of it.  (I do believe that we all need a little bit of fun money, after all.)  If nothing else, make a point to spend half and save half.  Even if you’re saving half in your vacation fund, anytime I receive any extra income, I like to put half of it away for the future.  Future me is always thankful when I do this.

Finally, though it seems like a great situation to be getting a chunk of money back from the government every spring, it’s really not.  It’s not free money, it’s a refund.  That means that it’s an amount of money that you overpaid.  The government has been holding your money for you and is now giving it back to you.  It’s like a free loan because you’re not even getting interest on that money.  Instead of getting a large tax refund, wouldn’t it be nice to have that money every month?  Take a look at your withholdings and see if you can change the amount withheld from your paychecks.  Even if you just stick the money into a savings account, with interest, you will have even more money next tax season than you would have received in a refund.

 

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