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It is getting close to that time of year when all the places you shouldn’t be spending your tax refund will be hanging banners that say, “YOUR W-2 IS YOUR DOWN PAYMENT!” Scary. So other than to heed my advice and stay away from places like that, how should you go about using the tax refund that an estimated 55-65 of Americans will receive?
Bankrate.com did a survey of those who will receive a refund and got some pretty interesting results: 58% will either pay down debt or save their refund, while 26% will buy necessities. But I bet when the check really comes, those numbers won’t be very accurate. Why? Because having a big chunk of money in your hands without a concrete plan almost always equals choices that aren’t nearly as good as if you write down what you will do when the money arrives. So let’s talk about how to plan out the most effective way to use your tax refund (or any big chunk of money you might happen upon):
Make a Plan in Advance
As obvious as this sounds, don’t wait until the check arrives or the direct deposit occurs. As soon as you know how much you’re getting, sit down and carefully consider what to do with this money. If you owe money, make your plans for that too. Don’t ignore the IRS – I promise they won’t go away. Expert gst registration services will guide you on the applicability and compliances under GST for your business and get your business registered under GST.
It is Your Money
Even though I’ll tell you what I think you should do with this money, remember that it is YOURS. If the IRS is giving you a refund, it means you worked hard all year and simply paid them too much of YOUR MONEY. They are nice enough to give it back (wow, never thought I’d say the IRS was nice…forgive me for that slip).
Be Strategic
If you don’t already have something to shield you from an emergency, your first priority needs to be to set aside as an emergency fund. How much? At least the amount of one paycheck. Break the cycle of living paycheck-to-paycheck. Then, assuming you have consumer debt (meaning you’re a “normal” American), I have five steps I teach to knock out debt and get your financial life in order.
- Cut Expenses
- Maximize Income
- Get Current on Everything
- Use the Dave Ramsey Debt Snowball to Arrange Your Debts
- Make a Call Every Time You’re Ready to Pay Something Off
I provide details on each of these in my book, so you may want to check it out if you really want to make the most of this year’s refund.
One Last Thought
If you got a huge refund this year, you should reduce your withholdings to reduce thisrefundIF you can use the money throughout the year responsibly – if not, maybe thetaxrefundapproach is necessary for now. But always be working toward the goal of avoiding paying the government too much of the money that belongs to you.
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About Barry
Barry is the husband half of the Humorous Homemaking team. He speaks and writes mostly about personal development and personal finance issues. He is the author of From Debtor to Better: The Details of Debt and How to Get Out! and regularly speaks at conferences and other events.
Disclosure of Material Connection: Some of the links in the content above are “affiliate links.” This means if you click on the link and purchase an item, I may receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsem*nts and Testimonials in Advertising.”
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Jenny saysI would’ve never thought to call and ask for interest charges to be removed. Our credit card company took off $150 when we used our refund to pay the balance off. Thank you so much for the great tip!
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- Stacy says
🙂 When Barry worked in collections he learned a lot of things. Hope this helps you a bunch!!
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- Debra says
We are selling our car and using our refund to make up the difference for a van.
- Marjori says
We are putting it towards paying off my car and buying an ammunition reloader + supplies for husband. I just paid off his truck yesterday & with his payment + mine & any extra bonus money, it will be paid off in August! PTL!
The 2 car payment amounts + any extra bonuses will then start going towards a (stupid) home equity loan we got 4 years ago for renovations on the house. I can’t wait until that thing is GONE – 8.25% on $35K makes for a long, expensive, rash decision. BUT, with this plan, it will be paid off in 3 yrs, as opposed to 22!! 😀Thanks for all you do!!
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- Barry says
Sounds like a good plan!
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- Alicia says
We’re going to put most of it into savings to help restore the bit of our emergency fund we dipped into when we bought our first (and I hope, only) home last year. We are going to spend some to buy a new fridge – the one in our house is as old as I am so the doors don’t seal. I’ve already had to throw out food because it wasn’t cold, so it’ll save us money in the long run on waste and I’m pretty sure on energy costs too.
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- Barry says
We’re fridge shopping too so if you have any good tips on saving money on one, please share!
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- Amanda says
My husband and I work incredibly hard, make good money, make donations, and have toddlers, but barely seem to get anything back even though our exemptions are married and 1. Others we know get tons back and don’t even have kids. I realize every situation is different, but it makes us wonder if we should pay extra and change from our regular lady (who’s done taxes for years) or switch to a firm who is costly. Any suggestions?
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- Barry says
Unless your tax prep person is doing a poor job, it is unlikely that is the issue. I actually encourage you to get as small a refund as possible, as that means you’re not paying the IRS too much throughout the year. I’d say it is related to your income vs. deductible expenses. Wouldn’t hurt to have someone else take a look, but be prepared to pay for what will likely be no or very little difference.
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- Margaret says
Ours is going to pay rent for the time during the summer when we are incomeless. Otherwise, it would go into our house savings fund. Same as every year. Boring, but necessary. 🙂
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- Jessica Smartt says
So here’s my question…What are YOU doing with yours? I’m curious what people who already have an emergency plan in place might do with extra cash! Any room for a splurge? Give away? College savings? Or maybe you, like my father in-law, have it down to such a science that the IRS owes you $0.00 and you also owe them nothing!!!
You can plead the fifth here if you want! 😉 Just curious!Reply
- Barry says
Thanks for asking, Jessica. This year we are going to owe the IRS. Where I moved to a new employer, we rolled my 403b from the previous employer into a Roth IRA so we’ll have to capture that taxable gain. In addition to that, we’ll have the income from my financial counseling and book, then Stacy’s cookbook and this site. The IRS loves us and wants us so much I expect we’ll probably have to start paying quarterlies. Our tax situation is not very much fun, but making money sure is!
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- Megan says
We’re filling up the emergency fund and putting the rest toward being able to grow more of our own food and livestock. A living emergency fund, if you will.
At least a small part will go toward stocking up the pantry. When my husband was laid off, that extra food was the difference between eating well and going skimpy.
Extra guns are a great idea, too!
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- Barry says
Sounds good to me!
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- Faith Storms says
Do you still suggest using the Dave Ramsey debt snowball method if you have debts that are not collecting interest and ones that are? For example, we owe my husband’s parents a small amount of money that is not collecting any interest. We also owe money on my husband’s student loans that are collecting interest. According to the debt snowball, we should pay off the smallest debt first, but that leaves the larger debt accumulating interest while we work towards paying off the smaller debt.
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- Barry says
I would still suggest the debt snowball for you. The point is not to save interest money – the point is to kill off the debt! I liken it to a bunch of bad guys in a dark alley – if I’m walking down the alley and they are all threats, I don’t care which ones go away, I just want them gone. Which ones are the easiest to make go away? The smallest ones! Since you also mentioned your husband’s parents being the creditor, I would put extra importance on getting that paid back. The Bible makes it very clear that the borrower is slave to the lender and I would want to remove those chains ASAP!
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- Faith Storms says
Thanks for the suggestion! I will share your “dark alley” analogy with my husband. We are getting a HUGE refund back, so we should have enough to pay off the small debt we owe his parents and still put a chunk towards the student loan debt that is still accumulating.
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- Lori says
No, Barry, they are not “nice,” they are “obligated,” HA! You are forgiven!
I filed my taxes yesterday, and I am paying off one huge debt, getting ahead on my daughter’s dance tuition and saving the rest for an emergency fund.
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- Stacy says
Sounds like a good plan to me…and thanks for the forgiveness. ;0)
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- Tara H says
Quick update on us…we had 6 debts (including our car payment). We were able to pay 3 completely off!! We also saved $1,000 for an emergency fund, bought all of our school books for our boys for next year, saved enough for a small vacation (we try to make sure we can take the boys somewhere, usually just Chattanooga), and my husband got 2 new guns. That was important to us in light of what’s happening in our country.
Thanks for all of your advice! Now we just have 3 more debts to go! Praise God!Reply
- Stacy says
Go, go, go!!! I’m so proud of you, Tara!
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