What to do with your tax return
Tax season in the United States is an interesting time. People act like their tax return is what they live for. They act like
they absolutely know they’re going to win a multi-million dollar lottery. They make all kinds of plans for their “fortune.” They’re going to buy a new car, a new stereo system, the fishing boat they’ve always wanted, or take a vacation of a LIFETIME!
Let’s talk about this.
A recent survey shows 69% percent of Americans have less than $1,000.00 in savings. This includes the 34% of Americans who have no money in savings. If you have little or no money in savings it’s very difficult (impossible) to prop yourself up when things go wrong: unemployment, illness, a broken down vehicle, any major problem. To avoid calamity we need to be debt free. We really need to have adequate savings.
Let’s say you’re anticipating a fairly hefty tax refund. You’ve been considering what to do with it. Your top two choices are the down payment on a boat and a vacation. You think it’s been years since you’ve indulged in anything extravagant. You’re not thinking about the fact that you have no money in savings. Why don’t you have money? Because you’ve regularly used your cash to gratify “small” indulgences. (Do you keep track of how much you spend on fast food, or jewelry from QVC, or ….?) Now, let’s say your car isn’t in the greatest shape. One of these days, it is going to have a serious break down, and because you have no money in savings, you’ll need to borrow for the repair (or—maybe—replace it?).
Should you plan to use your tax return to buy that new boat or go on vacation?
The answer is, “No.” You need that money to help prop you up when you meet one of life’s mishaps. (You also need to start saving regularly. I’ve addressed that issue in several posts. This —really—is a no brainer. Most financial decisions are no brainers. It comes down to living on less than we earn and differentiating between needs and wants. After you have established your needs and wants, you can plan your money in such a way that you have a financial cushion when “life” happens. When you’ve protected yourself against times of emergency, you can start saving for those things you want (that vacation of a lifetime).
Here are a few examples of advantageous ways to use your tax return:
1) You, probably, own a car. You keep it legal, so your registration and plates are current, and you have it insured. Those are recurring expenses. Hopefully, you’ve budgeted for them, and they don’t pinch your lifestyle when they come due. Maintenance and repair are other categories of expense that can be more easily handled if you regularly put aside money for them. But … are you prepared for the unexpected expense of an accident? Let’s say your deductible it $250. Will covering that amount be a problem? Why not put your tax return (at least a part of it) in a fund to cushion the financial impact of the deductible?
If you don’t have money set aside for this type of event, you’ll have to borrow it. (Another no brainer.) Saving money for expenses on an “installment plan”—a budget based on your paycheck—is a great idea. So is increasing your financial safety net by contributing larger sums that are essentially windfalls (like bonuses and tax refunds).
2) Car trouble isn’t the only thing that can cause a financial emergency. Eventually, almost everything we own will need to be repaired or replaced. Those “fixes” cost money, and it’s possible that you could have to deal with more than one at a time. Saving your tax refund to use against these expenses can greatly reduce their negative impact on your life.
3) Where’s the guarantee that you won’t find yourself between jobs at some point in time? It’s impossible to plan for everything that could go wrong, but you can have an emergency fund. Most financial advisors recommend you have three to six months of living expenses in savings. Use your tax refund to start or add to an emergency account.
4) If you have a credit card balance, use your refund to pay it off. If you can’t pay it off, pay it down as much as you can. By paying it down, you make it possible to pay it off early and save money that would have gone for interest. (Of course, if you want to pay it off early, you can’t reduce the amount of your regular monthly payments.)
5) Because I can save so much money, I buy as many of my groceries as I can on sale, and I stockpile the staples. I have written a post telling you exactly what I do and how I do it =how to save money on groceries=. When I began shopping this way I did it little by little, but I if had thought of using my tax refund to secure the supply, I could have cut my customer’s (that’s me) costs much sooner.
6) Years go by quicker than you’d think. If you don’t have a retirement plan, start one. Consult a professional about investing and use your tax return towards a more secure retirement.
The above are a few ways to use a tax return profitably. It certainly isn’t an exhaustive list. I’m sure you can think of other financial issues that need your attention. (Just now, I remembered the deductible and maximum out-of-pocket expense for health insurance.) Believe me, when I get a substantial amount of money, I still think of the fun the things I could do with it. Really, I do get to do some of those things, and I believe I enjoy them all the more because I’ve taken steps to protect myself financially.
I’m certainly not the only person who thinks this way. I when I was young, I was enlisted in the Navy. Navy pay was adequate, but I didn’t know anyone who felt they didn’t need to watch their finances. I’d like to share a story about someone I worked with who got his “vacation of a lifetime” despite what could have been a financial disaster:
This was back in the mid-80s. A fellow, assigned to the same ship I was, decided to take leave and go to Scotland with his family (wife and teenage daughter). He had some extended family there, and for three years he’d been saving for the trip. Two weeks before they were to leave, their car engine seized up and stop running. I saw him a couple of days later at work. I asked about his car. He told me he’d already bought another one. I was amazed he could just go and do that. That’s when he told me it was a good, used car he’d found listed in the paper. That made sense; he and I had talked financial strategy before, and I knew he was inclined to by used if he could get a good deal. (By the way, he was several years older and two ranks above me. Actually, my association with this guy was a big part of my decision to live frugally.) Anyway, I asked him if he was still going to be able to take his trip. (FYI: The plane tickets had already been purchased, but you know there are a lot of expenses beyond transportation to a trip like this.) He said, “Of course we’re going!” I asked how he was going to manage the trip after paying for the car. I mean, I knew he’d had to have paid cash for the car since he found it in the classified ads. I asked if he was going to have to get a loan to cover the trip. “Nope.” He said that the Scotland trip wasn’t the only thing he’d been putting money away for—that he had an emergency account. I asked him how he’d accumulated enough on his pay to do both these things in just a few years. He told me (1) he been living on a budget for a long time that included designated savings, (2) to finance this trip he and his wife both had taken on part-time jobs and banked all that money, (3) he banked “extra” money like his tax refund, and (4) even with the two large expenses, he still had some financial reserves . He also said that when he got back from his trip, he’d be saving for the next big thing—even if he wasn’t quite sure what that would be. They took their trip. Had a great time, lots of memories and pictures to share. The point is the sailor had done a good job of propping up his family financially.
Most of us rely on the money we earn to provide for a good life now—and in the future. Your tax return is part of that money. It’s money you earned and gave to the government to hold for awhile. Is should be worked into your financial plan. If you’ve been able to provide yourself with ample financial security through budgeting the money you take home, then your tax return can be treated as a serendipity. But… when you are considering what to do with those funds, do consider the state of your finances. If they could use some propping up, put them money where it will do the most good. You might not get the thrill of your life by doing this, but you sure can smooth out some of life’s rough edges.
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