The answer is what nobody wants to hear… it depends. Yes, it depends. There is no one-size-fits-all approach to how to best utilize your tax return. I can confidently say that the WORST thing you can do is blow it and then wonder why you’re broke by March 30th.
But, first things first, why are you getting a refund to begin with? You are essentially loaning the IRS your money at 0% interest. They are doing you the favor of holding your hard-earned money for you until you file. WHY? Maybe your life circumstances have changed since you started at your current job. Maybe you just don’t understand the correlation between what you chose on your W4 and your pay. Remember that form you filled out a long time ago that asked your marital status and number of dependents? It might be time to get that up to date. If you are consistently getting a very large return, and you are confident that money will be better utilized in your paycheck every week, it might be time to get that done. You can google a W4 calculator that will help you figure it out.
Now some of you like that big refund because you know, deep down in your heart, you are never going to save that kind of money if you had it in your pay. Kudos, at least you recognize it. Then the question becomes, what’s the best plan of action?
- If you are behind on any bills (rent, utilities, car, or student loan payments) congratulations, you can get caught up now. Not fun, I get it. But life is a whole lot better with electricity and water.
- If you have any high-interest debt, usually a credit card or God forbid a payday loan, BOOM! There goes your refund.
- Next, do you have a car or student loan you’ve been chipping away at? Send that whole sum to the PRINCIPAL. Make sure it does not go interest. Alakazam, you’re broke again.
- If you are in a good place, you want to shift focus to your future self. The next step is your emergency fund. Do you have 3-6 months of your expenses saved up? If not, you need to protect yourself from a job loss, a major home repair, or your car breaking down. Throw it right into a high-yield savings account. You should be getting a minimum of 4.3% in your savings account, or you need to find a new bank. Just google it, there are tons.
- You have savings, so now what? It’s investment time baby! You can put up to $7,000 into a Roth IRA as long as you are within the income limits. High earners, google Back Door Roth. Now don’t just TRANSFER the money, you have to actually BUY something. Depending on where your account is, there are usually target funds that align with your retirement year if you don’t feel confident choosing something on your own.
If you are at the point where you have money to invest, it is time to invest in education. READ BOOKS on investing. All it takes is one book to change your life. Other than mine, I recommend the Simple Path to Wealth by JL Collins. It makes it all so easy. However, you need to extend a little bit of effort for a lifetime of reward. Don’t assume you can’t. You can! Anyone can. Just take the first step.
If you want to put your big girl/boy pants on and start getting that money in your paycheck instead of letting Uncle Sam hold it for you, AWESOME. Let’s go! You need a budget! You need a clear plan of how you are going to allocate those funds all year long so that they don’t end up in DoorDash and Amazon’s wallets.
Don’t know where to start? I got you. Download my free budget templates in my store and start there. If you need someone to walk you through it and hold you accountable, I can do that as well. Start with booking a free 30-minute session and we can figure out exactly what you need to be confident with your own money.
