Making a plan for your tax refund is a sure way to help your financial situation and keep you from making an impulse decision you’ll regret.
According to the IRS, the average tax refund issued last tax season was $3,253. Additionally, many Americans spend the refund before it even arrives. Before buying new electronics or taking the family on a fabulous vacation, consider taking a pause. Given the economically challenging times we face, it may be best to take a more practical approach to designating the funds.
Making A Thoughtful Decision
During the time between receiving your refund and deciding what to do with it, think about the options that make the most sense for you and your family. Take yourself out of the psychology of the “feel good” cycle where spending the refund in one fell swoop provides instant gratification, and give yourself space so you can make a clear decision when you’re ready.
Most taxpayers surveyed by Jackson Hewitt in March 2022 say they’ll immediately spend their refund on essentials like groceries, rent, utilities, and bills. If this is the case for you, then kudos for prioritizing the essentials. However, if this isn’t you and you’re in survival mode this year, it may be a good idea to reexamine before finalizing your decision.
On the other hand, if you’ve been hunkered down, paying off debt, getting caught up on bills, and putting away money here and there in savings, you may feel like you’re getting ahead with your finances. With so many options available — paying bills, building savings accounts, investing, or remodeling your home — how do you know what the best move is? Taking a more practical approach, particularly this year, may be wise when deciding what to do with your tax refund.
What’s Your Money Mindset?
Your money mindset is the set of beliefs and attitudes you have about money that drives your decisions about saving and spending. Coming to grips with yours is essential for realizing how it influences the behavior that may be holding you back from reaching your goals.
Are you in survival mode? If so, consider using your refund to:
- Boost or start your emergency savings fund
- Catch up on bills
- Pay your vehicle registration
- Pay your insurance in one lump sum (some companies have a 1-pay discount!)
- Buy essential uniforms for work or school
Do you feel you’re getting ahead of your finances instead of behind them? Here are some ways you can keep the momentum going:
- Pay down high-interest debt
- Save for an upcoming expense
- Put it toward a home or car repair
- Buy what you need to make extra money – classes, certifications, licenses, etc.
- Give to a local charity
- Contribute to your retirement fund
- Seed a 529 educational plan
- Create an opportunity fund (saving for an opportunity that may come up later)
Making a plan first is the absolute best thing to do when you get lump sums of money. The plan might include using a portion to build up an emergency savings account, putting some towards debt, and taking an incremental amount to buy something small and frivolous for yourself. The key is to be mindful about how you’ll spend sums of money before you have it.