What should I do if I get a tax refund?

About 75% of Americans end up getting a tax refund for the year averaging around $2,300 . Is this good? Is this bad? What should I do with this extra money if I do get a return? These are all questions I hope to help answer in this short blog post!

Why does one get a tax return anyways?

People get a tax refund when they pay more taxes to the state government or the federal government than their actual tax liability. A refund is a check from the government for the amount overpaid. Most commonly, too much money is being taken out of ones check for taxes, and is returned during tax season. Most of the time this only happens to W2 employees.

After filing your taxes, if a refund is due the IRS will either cut you a check, or direct deposit this money within a few weeks. If you are curious as to what you should do with this money, keep on reading!

Is a tax return a good thing or a bad thing?

So here is the deal. Technically, a tax return is not a great thing. When you get a tax return, it essentially means that you loaned the government money interest free. Here’s the thing though. Even if you got a decent return, that return is often not going to have been large enough to make a large impact anyways. 8% on a $10,000 return would only be $800. Often, this 66 dollars in this case, would just fall through the cracks in your monthly budget anyways. Moral of the story, getting a tax return is not the end of the world, but it is best to get as close to zero as possible.

For some people, a tax return ends up being a forced little savings account! There are many people who end up getting a tax refund every year and use it on a multitude of things. So the real question is, what should that money be used for? Well here are a few things I would use it for!

Boost up that emergency fund!

If you don’t yet already have 3-6 months of expenses put aside as an emergency fund, this is a great place to start! Having a solid emergency fund is one of the first steps in creating a strong personal finance foundation. You never know what life is going to throw your way, and having money set aside for these curveballs is crucial. I recommend keeping this money in a high yield savings account. Ally and SoFi have some of the best interest rates from what I have seen.

Pay off high interest debt.

That debt lingering in the background is not going away. Use that extra money to pay off debt and possibly even remove the gridlock that has been keeping your monthly cash flow tight. When you can knock out one debt, such as a credit card, you then free up some money to stack on to your next debt. Snowball it into the next one over and over until the debt is gone. Sometimes a tax return can be that extra amount of cash you needed to get the snowball moving.

Put it towards your retirement goals.

Out of debt and have a solid emergency fund? Maybe it is time to use that money to get a head start on maxing out your IRA for the year. Some people get tax returns large enough to max out their IRA in one swoop! Planning for retirement should be a priority for everyone, and a tax return can give you a nice little head start. Want to learn more about what you should be investing in? In this episode of the Brew Bucks Podcast, Alec and I talk all about the power of using index funds. Listen on Apple Listen on Spotify

If you want further help creating a personal investment strategy I also offer personalized coaching! It’s a free conversation if you’d like to learn more. Free Conversation

Invest in your education or new tools.

Have you been wanting to take a course or purchase a new piece of equipment that will make you better at your job? Have you been wanting to learn something new that will unlock new opportunities for you? Using a tax return to grow your knowledge and take your effectiveness to the next level is always money well spent.

I plan on setting aside enough money to purchase three new courses and 50 books this year.

How about investing for your kiddos?

Do you have young ones at home? Have you started investing for their future? Using a tax return to invest in a 529 plan for your child’s future college expenses is another great use for that money! If you were to invest a $2400 tax return in a 529 plan every single year, your child would end up with somewhere around 105K for future college expenses (10% rate of return). College can be extremely expensive and the student loan crisis in America is out of control. Use this money to set your kiddo up for success! This is a digital guide for getting started.

Make some repairs to the home.

I know this is an area that I neglect way too often. When home repairs get put off, the problem often just gets worse and worse. Repaint the house, clean out the gutters, fix the fence, tidy up the landscaping, etc. These are all things on my current homeowner to do list.

Already doing all of these things?

Maybe it is time for you to enjoy some of that money! There’s the beauty of getting your financial house in order. You get to a point where things eventually almost get on autopilot. You get to a point where your foundation is so strong that it requires less and less attention and more and more automation.

If you’ve been working hard to create a solid financial foundation, it might be time you take that vacation, buy that new toy, or make some upgrade you’ve been wanting. That is the point of all this anyways right? Get to a point where you can enjoy money?

Moral of the story here, getting a tax return technically means you loaned the government interest free money, but it’s not the end of the world. Use that money to get ahead on your financial goals, and if you are already there, go enjoy some of it! You earned it.