The old adage that nothing is certain in life except “death and taxes” never seems more appropriate than in spring. Along with the budding of new life and the melting of snow comes all the “fun” of compiling documentation, receipts, and other appropriate paperwork, and writing a check either for tax preparation software or to an accountant or certified preparer to file your taxes. For some, in that process, there may have been the added pain of writing another check for taxes owed; indications are that the new tax law passed last year has caused an increase in both the number of taxpayers owing and the amounts owed.
Income tax refunds are one of the few bright spots in the annual pain of tax filing. The recipients may be tempted to spend them quickly, but that’s not always a good idea. While practicalities such as urgent medical needs or bills, overdue rent/mortgage payments, or other immediate needs may need to take precedent, there are several possibilities for the use of refunds that will help build a solid financial foundation.
Many people think they need to either focus on paying down debt or building savings. The truth is that financial experts usually recommend doing both, although they often differ on the specifics of accomplishing such joint goals. The two primary recommendations are putting a dent in credit card debt, focusing on the card or cards with the highest interest rate, and starting or adding to an emergency savings fund. The amounts you choose to allocate to each of these goals is up to you, and also may depend on the amount of the refund. Both are very important goals that will help with your long-term financial security.
If you’re a parent, you may intend to use at least some of your refund on your children’s immediate needs, such as clothing, school supplies and activity fees. While this is sensible, you may also want to consider starting a savings account for them. Even a small amount of seed money would be helpful, and they can begin to learn about the importance of saving money and building a financial foundation for their future.
Other uses include preventive and/or immediate maintenance for your car and house, or saving up for a car and/or a house. And last, but certainly not least, it’s important to treat yourself. Many financial experts believe that it’s psychologically easier to save money and allocate it sensibly (credit card and rent/mortgage payments, etc.) if you allow yourself some kind of discretionary spending. This may include an item you’ve been wanting or a particular experience such as a concert, a short trip, etc. Just be mindful of what you’re spending on yourself.