Use a Tax Refund to Make Your Life Better • Everyday Cheapskate

Find out how to make your tax refund work harder for you. From adjusting your withholding to dealing with debt and planning for the future, take control of your finances and watch your refund become a key to lasting financial security.

Discovering that you’ll be getting a tax refund is certainly not the worst news you’ve had in your life. In fact, it’s easy to see a tax refund as some kind of gift from the universe. You might even be feeling kinda’ proud of your forced saving account to which you knowingly contribute every payday while living from paycheck to paycheck and relying on credit to make ends meet.

But here’s the truth: A tax refund isn’t a gift—it’s part of every paycheck you should have been getting all along. It’s not a saver’s reward. You overpaid your taxes. Plan now for how you’ll manage that check, or your tax refund could evaporate into thin air.

Get smart

Start taking control of your finances by optimizing your tax withholding. Use the IRS withholding calculator to precisely determine the appropriate amount you should be having withheld from your paychecks. This tool provides tailored recommendations based on your unique financial situation, ensuring you neither owe nor receive a large refund come tax season.

Remember, a hefty tax refund isn’t cause for celebration—it signifies overpaying throughout the year. If you can come within $100 of that goal, you’re golden.

But wait, you’re not done. Lock eyeballs with the additional amount you see in your next paycheck—the money you’re no longer sending to the IRS. This extra cash can be a game-changer, empowering you to allocate it towards essential expenses, savings, or debt repayment, putting you on the path to financial success.

Do what good money managers do

Set up an automatic deposit authorization with your bank or credit union to transfer that amount into your savings account. By automating this process, you ensure that a portion of your income is consistently allocated towards building your financial reserves.

Remember the mantra: “Out of sight, out of mind.” If you leave it in your checking account, I promise it will simply evaporate into your routine spending. Now is your opportunity to act responsibly.

Manage that refund

As for this tax refund, you have options—at least five that follow. The decision you make about what to do with that check could either make things worse or make your life so much better. Choose well.

1. Create an emergency fund

It’s easy. Take the check to your bank or credit union and use it to open a savings account. Then, walk away and leave it alone, knowing that you have a fallback if something severe and unexpected happens that you absolutely cannot cover with your regular income.

You might lose your job and need to keep food on the table and pay the bills for a few weeks while you make the transition. You may lose a friend or relative five states away, and the trip is more than you can handle without going into debt.

How it makes your life better

Having an emergency fund eases stress in our lives. Just knowing that you have a way out of unexpected, totally unforeseen money jams in the future reduces stress. You’ll avoid worry and anxiety about what you will ever do if your car doesn’t start or if you lose your job. That’s the side benefit of having an emergency fund in place.

- MORE: How to Get $1,000 Into Your Emergency Fund

2. Pay off a debt

Once your emergency fund is established, consider using that refund to pay off a debt, such as the balance on a credit card account or student loan bill. Just do it before you think of a dozen ways to fritter away that refund money.

How it makes your life better

It’s hard to describe in words the wonderful feeling of freedom that comes with knowing the debt is gone. There are no more payments on it, no more lingering, annoying balances to deal with every month. You’re free from it. Whatever the monthly payment on that debt is, it is yours to keep and manage in a way that will improve your life. It will be easier to keep all of your other bills paid.

3. Open an IRA

Using the refund to improve an existing retirement account or start a new one could be the smartest use of it. Once you’ve done that, it will sit there and earn a solid return each year, with the balance compounding and growing until you reach retirement age.

How it makes your life better

Traditional IRAs offer tax-deferred growth, while Roth IRAs provide tax-free withdrawals in retirement. If you opt for a Roth IRA, the amount of this tax refund, plus the compounding growth over the years until you choose to withdraw during retirement, is all yours. All of it! That’s the nature of a Roth IRA. See your tax advisor for more specific information that relates to your situation. To open that account, see your bank.

- MORE: The Ultimate Risk-Free, High-Yield, Guaranteed Investment

4. Anticipate what’s coming

How emergency-prepared are you with a supply of non-perishable food and water? Do you have a solar generator in the event of a power outage? Or are you ready to replace a major item like a car or some other big item whose imminent demise is looming large?

Use this tax refund to get ready for it. Putting money aside in anticipation of a specific need is really smart. That’s what money managers do. They see the big picture and plan accordingly.

How it makes your life better

By having at least some amount of the cost of what you know is coming down the pike, you will eliminate stress and worry about how you will ever be able to deal with it. You stop living in denial because now you have a plan and money in the bank to deal with it.

- MORE: Dumb Things To Do with a Tax Refund

5. Invest in your future

Rich people start out as poor people. If this tax refund is money you will not need for at least 10 years, put it to work in the stock market. Take the plunge, trust your decision, and don’t look back.

How it makes your life better

Because you are investing for the long haul—not jumping in and out of the market—you can rest and relax knowing that you are improving your financial future, no matter what happens. You will be in better shape than you would have been had you spent that tax refund check wastefully. That means less money stress and fewer worries to keep you up at night.

Don’t know how to get started?

I recommend to you Mike Piper CPA, author, and investor. First, read his book, Investing Made Simple. It’s a short read, easy to understand, with fewer than 100 pages for those of us with the attention span of a gnat.

Investing Made Simple by Mike Piper - Paperback

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Investing Made Simple by Mike Piper - Kindle

This book is the best thing out there if you feel like you know nothing about investing, have no clue how to get started, and are scared to try. Read it, small cover to cover (this book is like pocket-size!), then become a devoted follower of his blog, Oblivious Investor. Learn all you can about Index Funds. Ask questions and build confidence.

I’ve known Mike for years, followed him closely, and trusted his teaching and sound advice. You should, too.

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Lisa says:

February 16, 2023 at 4:06 pm

Since our children are now grown, we don’t have many deductions so are at the point where we have to pay- not much, but just a few hundred. We found by opening an IRA not only do we not have to pay, we get a refund. Def a no brainer if you can afford to do it and put money towards retirement.

5 Ways to Use a Tax Refund to Make Your Life Better

Get smart

Do what good money managers do