5 Ways a Tax Refund Can Make Your Life Better

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

Change your withholding (use this calculator to determine the amount you should be having withheld along with instructions on how to change it). Your goal is to neither owe nor to be owed at the end of the year. A big tax refund is not a good thing! 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 amount you will not be sending to the IRS to hold onto for you. Do what good money managers do—create an automatic deposit authorization at your bank or credit union for that amount to be transferred into your savings account. Out of sight, out of mind. If you leave it in your checking account I promise it will simply evaporate in your routine spending. Now is your opportunity to act responsibly.

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

1. Create an emergency fund

It’s easy. Take the check to your bank and use it to open a savings account. Then walk away and leave it alone, knowing that you have a fallback if something serious 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 the bills paid 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 int0 debt.

How it makes your life better

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

2. Pay off a debt

If you have your emergency fund established, consider using that refund to pay off a debt like 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 that debt is gone. No more payments on it, no more lingering, annoying balance to deal with every month. You’re free from it. Whatever the monthly was on that debt 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 to start a new one could be the smartest thing you can possibly do with that refund. Once you’ve done that, it will sit there and earn a solid return each and every year, with the balance compounding and growing, until you reach retirement age.

How it makes your life better

If you opt for a Roth IRA, using the amount of this tax refund to open it, 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.

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.

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 then 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 making your financial future better, 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 commend to you Mike Piper CPA, author, and investor. First, read his book, Investing Made Simple. It’s simple, easy-to-understand, and fewer than 100 pages for those of us with the attention span of a gnat.

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, build confidence.

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


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5 replies
  1. Birgit Nicolaisen says:

    My goal is always to have as small a tax return as possible. This year we owe a little due to no longer getting the child tax credit. I’m in no rush to pay it. 🙂

    My husband and I are both retiring this year, so next year’s return will be interesting to complete, to say the least since our daughter is also starting college. Thank goodness for TurboTax!

    Thank you for all your good advice. I have tried to follow your lead as best as possible and we are in a pretty decent financial state now. We plan to pick up part time jobs to supplement our reduced retirement income, but that will still leave time for us to enjoy some down time.

    Reply
  2. Pat Goff says:

    I am paying off debt and putting $100 in my savings for an emergency like I do every year when I get my income tax refund. I now have $500 in my emergency fund and only have $4000 left to pay. I had to use my credit card to reroof the house as they were going to cancel my insurance. Then I had to replace my car after a car accident. I only got $1200 and hadn’t found a car for that amount of money that would be safe to drive. After my father passed away I got 1200 and then got my income tax refund and bought a car at the beginning of lockdown. This year all my refund is going to pay off debt.

    Reply
    • Judy Jenkins says:

      Next time you need a vehicle you might want to check your state agency. Illinois has a web site where they sell surplus vehicles. Most have been well maintained. But they may have high miles, need a battery, have a dent and if they were former police vehicles the center console has been removed or altered for their equipment. I worked as a state employee and have visited the lot. I also purchased a 4 x 4 Navigator for my former boss. It had been used by the state coroner, had brand new tires, logos had been partially light sanded and it needed a battery. $1500 and my boss was thrilled with the purchase. Cars, trucks, jewelry, computer equipment, etc. The state has warehouses full because state agencies and state universities rotate and waste, I mean spend, tax dollars changing out these items every year or two. Anyone can purchase from the IBid web site. Most other states have surplus sale items too. Best of luck. I feel your pain. My roof started leaking. I applied for a IDPH grant almost 2 years ago. Was told last fall I’d been approved for roof and siding (free through the grant due to low income) but then covid arrived and shut down Illinois contractors. Now two contractors got out of the program. Grrr, roof leaked a few days ago and damaged my ceiling due all the rain we’ve had in central Illinois. Take care!

      Reply
  3. Pat C says:

    Sorry, Mary, but most rich people start out as the children of rich people. And most very rich people are the children of very rich people. At the least, they have a great many advantages that the rest of us don’t, the best private education, health care, etc that money can buy. For most of us, our goals aren’t to be rich but to be solvent, to not slide into poverty, to help our children with their education as much as possible and not to be a burden on our families/society in our old age. And if we have a little left over for small luxuries like travel, that’s a bonus. And in this economy, those are impossible goals for a lot of people.

    Reply
  4. Linda Pries says:

    Being retired, my tax return is extremely minimal and goes directly to Bill’s. The stimulus, however, is more than a month’s income. From the most recent $1400 I first paid off two credit cards and put half of the remainder into savings. I splurged on a couple of “treats” for myself and the rest will be doled out for future needs.

    Reply

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