When your tax refund arrives in the mail, it’s tempting to see it as free money to blow on a massive night out, a shopping spree or towards that something special you want but, let’s be honest, don’t actually need (motorcycle, anyone?)
But your tax refund is not free money, it’s delayed income. Think of it this way: The average tax refund is $3,120, according to the IRS. If you are paid $15 per hour, that refund represents income that took 26 days of hard work to earn. Do you really want to throw more than a month’s work toward a frivolous purchase?
Instead, think about putting your tax refund toward enhancing your financial health. Our advice: spread it out in a way that benefits your overall financial picture. That’s not to say you can’t have fun with it – you can! Just be smart about how you allocate it. We put together six smart ideas to make your tax return work for you, including suggestions for what percentage of your tax refund should go toward each:
1. Pay down high-interest debt (25%) If you are burdened with high-interest debt, the cycle feels vicious and inescapable. But, by putting your tax refund toward lopping off a big chunk of debt, you’ll be taking your first step toward financial freedom. From there, take a moment to map out your plan for paying off your remaining debt. Then, reevaluate your spending habits and stick to a budget to ensure that you put a stop to your debt-incurring ways.
2. Build your emergency fund (25%) What happens if your car dies and you need to pay for a major repair? What if you or someone in your family gets sick and you are slapped with hefty medical bills? Or if your boss cuts your work hours because the company has hit a financial rough patch? These are the kind of life emergencies that just happen. While you can’t predict when something might occur, you can establish an emergency fund to limit the pain. Using part of your tax refund to build your emergency fund can give you peace of mind.
3. Save for an upcoming expense (20%) We all have major expenses that would blow our day-to-day budget. Instead of making these purchases and incurring debt upfront, regularly sock away a portion of your income for these outlier expenses and use your tax refund to accelerate your progress toward your goal. That way, when you want to buy that new washer/dryer, a new bike for your kid or make some home improvements, you’ll be able to pay cash and retain your financial freedom. Also, check out Save Your Refund for ways to win cash prizes for saving your refund.
4. Invest in yourself (10%) Your skills are your greatest asset in the labor market. Use your tax refund to fund things that will make you more valuable and able to command a higher salary. That may mean spending the money on a course or training that takes your skill set to the next level. It can also go toward paying for a conferences or professional organization membership that will help you expand your network. It’s often those personal relationships that gain you entry into coveted jobs. This kind of smart spending can change the whole course of your career and pay off in big ways, both in terms of a higher salary and greater job satisfaction.
5. Pay it forward (10%) In a way, you’ve been managing this whole year without this tax refund. So why not share it with someone who needs it? Pay it forward by giving to a local charity or an organization whose mission touches you. Not only will you be helping an important cause that impacts real people, you will also feel great about doing it. (Bonus: whatever you give will be tax deductible in the coming year.)
6. Put it toward something fun (10%) This is still money you earned, so it’s still money you should enjoy. As you consider all the ways you could splurge, keep in mind that studies show that we feel longer-lasting happiness from experiences than material goods. So splurge on travel, on concert tickets, on photography classes or on another hobby. And if you can plan these experiences with those you love, that will only magnify your joy and create great memories.
Remember, your tax refund is money you worked hard to earn. By spreading your tax refund across these different aspects of your life – including having fun – you are investing in a brighter, more financially secure future and a more abundant life.
The materials on this blog are provided for informational purposes only and do not reflect the opinions of ChimpChange LLC or Central Bank of Kansas City, Member FDIC. Several of these blog posts may contain links to content on third party websites which are provided for your convenience, please note that linked sites may have a privacy and security policy different from our own, and we cannot attest to the accuracy of information. ChimpChange LLC and Central Bank of Kansas City do not guarantee nor expressly endorse any particular product, service or third party content.