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The good and bad with taxes.
The good news is hopefully you are receiving some tax refund back.
The bad news is you have to file your taxes. (If you haven't started yet, learn how to file your taxes online in one afternoon.)
For this post, we are going to focus on the good news.
Now, decisions have to be made on what to do with your tax refund.
Are there smart ways to spend tax return? Or is this the year you want to blow your tax refund?
Now, that we have determined a tax refund is coming your way! Yeah!
So, how are you going to spend your tax refund?
Key Thoughts on a Tax Refund
Before we talk about how to spend tax refund, let’s discuss how much you are overpaying.
While this isn't something many people want to deal with, it is important.
Simple reason why… YOUR HARD EARNED MONEY is not earning you anything. In actuality, the money is decreasing in value due to inflation.
Would you give willingly give your money to someone knowing that you don't receive anything in return. Probably not. But, that is what happens when the government issues you a tax refund.
Also, I don't like being the negative nancy around here. But, there have been instances where tax refunds have been delayed by the government for one reason or another.
Be proactive and knowledgeable about how taxes impact your personal finance situation.
Sweet Spot for Tax Refund Amount
The opinions vary greatly on the tax refund amount that is okay to get back. But, remember you aren't able to use your money each and every month for you deem to be fit.
So, if you are consistently getting a HUGE return, then is is time to use a federal tax calculator to see what the taxes owed would usually be.
Typically, Money Bliss suggests the sweet spot of getting back a tax return amount around $1,000-$2,000.
That way you don't have to pay money. Also, you aren't giving your money away interest free.
If you tax return is greater than $2,500, adjust your withholdings with your employer. Use this W-4 Withholding Calculator here to help determine your tax withholdings.
This will allow more money into your paycheck every month. Why wait for your own money?
Remember, a tax refund is not a gift!
It is your hard-earned money that has been set aside by the government not earning interest.
Variables that Impact Tax Refund Amount:
Not everyone will have the same year as the past years. Here are many common variables that affect your tax due:
- Increase of Income
- Getting Married
- Buying a Home
- Starting a Family
- College & Education
- Starting a Business
Just remember… New tax changes were passed in December 2017 and took effect in January 2018. (That means the taxes being filed in 2019 will start to see the new tax changes). This was the biggest tax code changes in over 30 years. Learn more here. Most individuals will start seeing a bigger paycheck with less taxes withheld. But, that equates to a small than anticipated tax refund.
So, make sure to use the W-4 Withholding Calculator to see if you need to adjust tax withholdings or not.
Related Post: Simple Ways NOT to Spend Tax Refund
Best Way to Spend Tax Refund
Okay, in all honestly, this answer will vary from person to person.
The reason why is everyone is on a different money journey.
There are too many variables to determine one simple across the board answer on the best way to spend tax refund.
However, there is one straightforward way to help guide your decision on the best was to spend your tax return.
Your Steps Towards Financial Independence
The smartest way to spend tax return is to put it towards your financial freedom.
That is the place you decide how to live life because your finances can support your decision.
However, you need to build a solid foundation with money and then continue towards financial independence.
Review the Money Bliss Steps to Financial Freedom to see where you on. That will help guide your decisions on what you need to work on next.
Your journey is unique and true to your life.
While it is hard to set money aside for a future opportunity. However, if no saving of income happens year after year, it will be impossible to reach financial independence.
Related reading: 9 Habitual Things I Do To Save Money
Examples of Smart Ways to Spend Tax Refund:
Very quickly you should start to see a trend here…
It isn't about spending money, it is about saving that money.
Fund Emergency Fund
An emergency fund is vital to success with money.
In order to get ahead with money, an emergency fund is crucial to stop the debt cycle.
However, most people never stop and put money aside for an emergency fund. For most people, the average tax return should fund an emergency fund. However, there are many variables that can come into play.
Our guide on emergency fund covers everything you need to know.
Properly funding an emergency fund creates the strong foundation to the Money Bliss Steps to Financial Freedom.
Start a Medical Fund
A medical fund is money set aside to be able to pay health insurance deductible as well as ongoing monthly medical expenses.
Medical debt is the fastest growing segment of all debt.
Plus it causes lots of stress, which is bad for our overall health.
While this is one of the smart ways to use your tax refund, it may not be the most fun or one of the steps you don't see much progress. But, having money set aside for medical expenses is a financial smart decision.
Pay Off Debt
Debt will hold you back. Period. There is no getting around it.
Debt is the cash flow killer in your life.
Stop the debt cycle. Turn away and never go back.
Use your tax refund to pay for your overspending in the previous years.
In order to reach financial independence, the shackle of debt must be cut loose to freely walk in your financial independence journey.
Debt Related Resources for You:
- How to Get Out of Debt in 5 Easy Steps
- Are You Making One of these Common Debt Payoff Mistakes
- 7 Things to Give UP to Pay Off Debt Faster
- I'm Debt Free, How to Avoid Not Falling Back in Debt Trap
- Best Debt Apps To Payoff DEBT
Rainy Day Fund
No one wants to save for a rainy day because it may never come.
However, when it comes, it will hit hard and easy to find yourself drowning.
This is above and beyond a basic emergency fund! Think 3-6 months of monthly expenses.
A rainy day fund will weather you from the storm. It provides the money necessary to continue a foundation to financial freedom.
Be prepared for the unknown.
Roth IRA Contribution
The goal is to retire at some age and not work our whole lives, right?
Give yourself the biggest paycheck and save the tax refund for retirement.
The power on compound interest should be the biggest motivator. Start using your money to work for you.
Bucket List Adventure
What do you want in life? How will you get there?
This is where a vision is vital.
A bucket list adventure is something you want to experience while you are able to enjoy life to the fullest.
For everyone, this looks just slightly different. For some bucket list ideas, the amount of money is very small; others will need to start saving.
Start saving for what you want out of life. You are closer to accomplishing the Money Bliss Steps to Financial Freedom. Start saving.
That “Thing” Purchase
That “thing” is that “thing” that you keep putting off. Why? Because you just don't want to spend money on it.
Is a major appliance about ready to go out? Car needs new tires? A medical procedure you have put off?
Those big “things” that can bust any budget if not prepared for it.
Maybe it is a little “thing” purchase. Like needing a new coat? A new kitchen gadget you have been eyeing?
Maybe if you are lucky that you don't have “that thing purchase” hanging over your head, then think about starting to pay off your mortgage early or even saving for a major home improvement.
Invest in a Side Hustle
Every single day someone is starting their own business.
Simple enough… we are tired of working for someone else, want to build our thing, and passive income sounds very enticing!
Your tax refund could cover the start up money needed to start any online business or invest in a hobby.
Maybe it is time to invest in your current business… How to make the right financial decisions when marketing your business.
>>If you are considering a blog, I highly recommend you check out this free course to see if blogging is for you.
Must Read: 5 Reasons to Jump Into the Side-Gig Biz
If you are determined to achieve FIRE, then you better start saving and investing!
Not sure what FIRE is? Read more about FIRE.
Every single penny saved is one penny closer to reaching financial independence.
Socking money away to a retirement account is great unless you have aspirations to retire early.
So, invest in taxable account.
Enjoy & Have Fun
Last, take a small percentage for fun.
Let’s admit it… You have worked hard over the past year.
Treat yourself for your hard work.
A small percentage means less than 5% of your tax refund. The rhythm of life and money must be enjoyed.
If you have been diligent to your budget, then treat yourself to something you can’t afford.
If not, then maybe look into the advantages of budgeting, so next year you can enjoy a slice of that tax return.
What Smart Way Are You Going to Spend Your Tax Return?
Overall, there are many smart ways to spend tax return & not blow it.
It is a matter of choice.
When tax refunds start rolling in, it is a great time to evaluate where you stand in your money journey.
Maybe dig into the Money Bliss to Financial Freedom and begin enjoying life with money.
Start controlling your destiny.
And just for fun… Simple Ways NOT to Spend Tax Refund!