Around this time of year everyone gets excited for their tax refund. When you receive a refund it is because you were charged too much for your taxes. Thus it is like receiving your own money back at a later time. However, most people do not see it or treat it like that.
People tend to treat it as a bonus that they can use to buy the extra things they have wanted all year long. That is the recipe that brings them right back where they started financially. Sure, maybe they have one or two things that brought them temporary joy. In the long run though they remain unsatisfied just waiting for the next “bonus check” that we call a tax refund.
If you can instead treat your tax refund as money you earned then you can plan for your long term goals. Depending on where you are at in your financial journey you should either save it, use it to payoff debt, or invest the money you receive. If you use it to your advantage in this way you will have longer term happiness with your decision on how you used your tax refund.
I know it is easier said than done. So the best way to follow through with your plan is to decide ahead of time specifically what you will do with the money. How much will go towards credit card debt? How much will go into savings? What mutual fund do you specifically want to invest in? As soon as you know how much you will be receiving start planning it out on paper.
Once you have made up your mind and it comes into your bank, use it immediately. Do not wait to move it into a savings account, investment, or wait on setting up a debt payment. If you leave time between when you receive the refund and when you use it then you are more likely to procrastinate. Procrastination can then lead to spending the money on unneeded things instead of actually doing what you set out to do.
If you want to save all of it then set up an automatic deposit straight to your savings account. Then you do not even have to be tempted to use the money because you never saw it in your main bank account.
If you want to invest the money, when you receive it put it straight into an investment. Once it is invested pulling it out is more complicated. This makes it is easier to leave it alone to grow and eliminates the temptation to spend it all.
If you want to use it to payoff debt then set up an automatic payment. You can set this up ahead of time before you even receive the money by setting a future date. If you don’t receive the money by the time it nears the auto payment you can always cancel it and set up a new one. If you’re nervous about setting it up before receiving the money then you can wait until you receive it. Just make sure that as soon as you see that tax refund come through that you set up that payment. Remember that the longer you wait to set it up then the more likely you are to spend the money on temporary pleasures.
We all should start seeing our tax refund as a refund not as a bonus check. It may not be as fun in the short term but long term we will have more enjoyment when we reach our financial goals.
1 Comment
I once knew a person that got their tax refund and went on vacation with it. Because they got such a nice refund they decided to rent a red Mustang convertible because they “had so much money.”
The following week, they were hitting up all their friends to borrow money because they had over spent. Their friends wouldn’t loan them any money because the person had already borrowed money from them and had promised to pay them back when they got their tax refund.
I don’t know this person any more and I think a lot of mutual friends also cut off ties with them.
The morale of the story is, the tax refund is the money that the government held from your paycheck. You need to use it to pay your bills and debts.
Have a budget year round and include something in your budget to have some fun and relaxation time but never treat it like a bonus that allows you to do things you couldn’t otherwise afford. Especially if you have any debt at all.