Tips for tax refund savings
This is a rough tax season, due to the late action by Congress, but sooner or later we will all get our tax returns filed, and those of us who are due refunds will receive them. That leads to the question: what will we do with those funds?
If you’re like me, you have lots of ideas for what you might do with that extra money, and you also know that anytime you receive a chunk of “extra” money, it’s an opportunity to improve your overall financial situation. That may lead to a long (sometimes difficult) internal conversation about the best use for those funds.
Here are some tips to consider when deciding how to use your tax refund.
Take time to think over the benefits (short-term and long-term) of the various options.
Consider splitting your refund between two or more different goals, rather than “spending it all in one place.”
If you have high-interest debt, paying it off is a good investment. But I strongly recommend that you also take the logical next step: prevent future debt by setting aside a substantial amount of money for emergencies and/or for “periodic expenses.” (These are the predictable, non-emergency expenses that arise once or twice a year – such as back to school expenses, 6-month car insurance bills, birthdays, holidays, etc.)
Use part of your refund in a way that benefits your family in the long run – adding to your retirement account, for example, or college savings for the children.
If you use part of your refund to make a special purchase, avoid the temptation to overspend simply because the extra money is available. For example, if you choose to buy a new TV, and might normally buy one for $450, don’t yield to the temptation to buy a $700 TV just because you have the money. Remember that the extra $250 could be used for another goal, such as emergency savings or retirement investment.
Remember that financial security(short-term and long-term) is a reward of great value, even though you can’t see it in the same way that you can see a new TV or computer. To remind you of the benefits of financial security, consider making it visible: put a gold star on your refrigerator for every $500 in your emergency fund, for example. Or find a picture relating to your long-term goal (retirement, college, house) and hang it up where you will see it and be reminded of the benefits you are building because you saved part of your tax refund.
For more information on personal finance topics, go to www.extension.iastate.edu/finances, or www.extension.org, or contact me through your local office of ISU Extension (Webster County: 576-2119) or directly (515)832-9597 or firstname.lastname@example.org. Subscribe to our blog at www.blogs.extension.iastate.edu/moneytips.