Money Smarts Blog

Your tax refund: Finding the happy medium

Apr 5, 2022 || Jim O'Leary, Financial Health Coach

tax documents and cash

Tax Day is quickly approaching (April 18) and according to a 2021 survey by IPIX1031, two-thirds of you may already have that refund in your pocket or have paid Uncle Sam. (To the other one-third, it’s best to get on it sooner rather than later!)

If you're one that received or will receive a refund, I discussed ways to make your tax refund work for you in our last edition of Pathfinder Magazine. And while it’s a good idea to save and invest as much of your refund as you can, we also want to be realistic.

Meaning, we understand most people will find a way to spend at least some of their refund money. So let’s talk. How do you find that happy medium between saving and spending?

Think of it like allowance jars when you’re a kid. Saving, spending and giving. A good rule of thumb: 50% to “needs,” 30% to “wants,” and 20% to your financial goals.

Here are some ways we recommend you spend (and save) your refund:

  1. Pay off credit card debt. Use your tax refund to secure a share pledge loan, that way you pay off the high rate debt and once the share pledge loan is paid off you have your tax return back.

    If your refund doesn't allow you to pay off all your debt, we suggest paying off the higher rate cards first. However, if you can't pay off all the cards, target the cards, target the cards with the smaller balances to free up cash that can be used elsewhere.

    Your goal is to pay the cards off and put them away (lock them up, freeze them in ice – out of sight, out of mind). Keep them open, but don’t use them. If you find yourself using the cards again, you can refinance the pledge loan up to the limit again.

  2. Build or boost your emergency fund. An emergency fund is your silent best friend that’s there to help in the event of a job loss, salary decrease or unexpected financial emergency. Ideally, you should aim to have enough in your emergency fund to cover at least three months of necessary living expenses, but even $500 will help.
  3. Through a Balance Builder account, you can earmark funds for different projects, annual payments or “what ifs”. Look at automatic transfers into these accounts to build up savings without having to do it yourself.Consider home improvement projects. Make sure you stick to a budget and plan projects that add value to your home or reduce energy costs. It’s probably not likely that your refund will be enough to do a total bathroom overhaul, so consider smaller projects that add value like painting a room, swapping out finishes like faucets or cabinet handles, sprucing up your landscape or investing in energy-efficient appliances.

  4. Have fun! Even if money is tight, hear us out. Oftentimes when you cut back too much, it’s easy to throw your hands up and completely disregard your budget. So having some fun money set aside will make sticking to a budget that much easier.

What we recommend NOT spending your tax refund on:

  1. Unnecessary material things. It can be tempting to splurge on that new TV, gaming system or those 10 items saved in your Amazon cart, but are they smart buys? Instead, consider buying things you need or that’ll help in other areas of your life. For example, is your mattress causing you back pain? It could be a good time to invest in a new one because after all, we sleep approximately 26 years of our life. Or how about a new coffee machine to rid you of those weekly Starbuck cravings?

  2. Betting (casinos, online betting). Since it’s money you weren’t necessarily planning on, it can be tempting to put it on red in hopes of on getting even more money. Don’t do it! Gambling has no guaranteed rate of return, and the odds are almost always stacked against you.

  3. Spendy vacations. You didn’t take first-class flights to your oceanfront villas before, so why start now? Especially if you truly can’t afford it outside of your refund. Instead opt for going on a vacation within your budget but consider splurging on a nice dinner out one night or an excursion you’ve always wanted to try.

Trying to decide if it's a smart purchase?

Ask yourself this question: How many hours of work will it take to me to pay for this? Say what you’re wanting costs $500, and you make $15 an hour.

$500/$15 = 33.3 hours

Is it worth 33.3 hours of work pay for it? How many hours of enjoyment will you get out of it?  Is it a value to you and how?

The truth about your refund

Getting that big tax refund is great, but it means you had more tax withheld from your paychecks all year than was necessary to cover what you owe. You essentially let the government use your money for free all year. They’re just giving you back what’s yours to begin with, without any interest.

It can be a good thing if it prevents you from spending the money during the year and you put your refund toward a good purpose when you receive it. If you’d rather not overpay throughout the year, you can make adjustments so the IRS withholds less and you keep more each payroll.

You use the Form W-4 to do this, which consists of your filing status (i.e. married, single or head of household) and the number of dependents you have. The IRS recommends redoing your W-4 each year or when your personal or financial situation changes. Have questions? Reach out to your HR person, they can help.

Helpful tools:

  • Track my IRS refund status:
  • Need help deciding how best to make your refund work for you? Schedule a financial health check up today.
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