Tax season is upon us, and if you have any income you are probably hoping for a hefty check after filing your return. The big question once your tax refund arrives is what to do with it. Read on for some ways to save that money, as well as smart spending tips if it is burning a hole in your pocket.
Part of your income
The experts at TurboTax would like to remind you in their article “How to Spend, Save, or Stretch Your Tax Refund” that your tax refund is not a gift from Uncle Sam. In reality, that money is part of your income and you should take that idea into consideration when you are deciding on whether to spend or save that check.
What’s more, if you are getting too large of a refund, then you may need to adjust your paycheck withholdings. According to TurboTax, “the amount that is withheld from your paycheck is based in part on the number of exemptions you entered on the W-4 you gave to your employer.” Their site offers a calculator that lets you adjust your exemptions and predict different scenarios for a bigger paycheck and a smaller tax refund before you commit to a change.
After all, you don’t want to use the government as a de facto savings account when you would be better off setting up an automatic transfer from your checking to your savings after each paycheck and holding onto those funds yourself.
Where it goes
More and more Americans are opting to save their tax refund money or are using it to pay down their debt. On March 11, 2013, Allison Linn posted “Save or spend? Here’s how you’ll really use your tax refund” for Today Money and cited statistics from a TD Ameritrade survey, which “found that 47 percent of those expecting to get a refund plan to bulk up their savings account with it, while 44 percent plan to use the money to pay debt.”
People who responded to the survey were allowed to pick more than one choice. Other responses included about 28 percent who planned “to spend at least some on necessities and 15 percent plan to splurge on something discretionary.” Linn reports that the bulk of people who plan on using the money to pay off debt or put into savings actually follow through on that plan.
Smart spending tips
While it may be tempting to go on a shopping spree or hit the highway for an epic road trip when you get your tax refund check, there might be smarter ways to spend that money. Popsugar.com offers some suggestions in “5 Smart Ways to Spend Your Tax Return” posted on February 22, 2011:
- Begin an emergency fund—Things happen when you least expect it, and if you have some cash set aside, you might be able to avoid pulling out the plastic.
- Create a savings account—This should be separate from your emergency fund and can be used to save for any big expense, from a post-graduation trip to grad school.
- Pay off credit card debt—Having a credit card for emergencies is fine (especially if you don’t have a solid emergency fund yet), but carrying a large balance is no good.
- Service your car—Your wheels are essential to your life, keep them in the best shape possible by heading off service issues and you will save yourself some headaches.
- Treat yourself—You don’t have to save ALL of your tax refund, so go do something fun like buy a new dress or a couple of new video games, just don’t go crazy.
It isn’t often you see a big chunk of change like you see in your tax refund, but that is all the more reason to think hard before spending it all in one place. After all, you won’t be financially stable, much less rich (!) by blowing every cent you get as soon as you get it. Sometimes the best ways to save are by taking advantage of smart spending tips. So try to think of other ways to utilize the money that will be beneficial to you in the long run.
So what will you be doing with that check post-April 15? Are you a spender or a saver? Let us know in the comments below.