It’s tax season again and while most of us dread the physical act of filing our taxes, many of us look forward to a large refund. In fact, nearly 75% of Americans are in line to receive a tax refund. With the average refund totaling nearly $3,000, for many of us it marks the biggest payday of the year. If memory serves, I believe the biggest refund I’ve ever received was around $3,600 – so it can be a significant chunk of change for many of us.
Should You Throw It All Toward Debt?
As many of us prepare for this large sum of money to arrive, have you decided how you’re going to use it? According to a CNBC report, the vast majority of people who do receive a refund say that they are going to use it to pay down debt, while others say they are going to take a vacation or make a big purchase. While it seems like the fiscally responsible thing to do would be to use your entire refund to knock out debt, it might not be the wisest choice. Let me explain.
A 3-Pronged Approach
Have you ever wondered why you can’t seem to crush that mountain of debt you keep throwing large sums of money at? I mean, if you take your entire return and pay down debt you feel good about your decision at the moment, but what if the real cause of your debt problem isn’t the debt. Perhaps the core issue that’s creating the debt is that you have a spending problem. It might be time to work on creating a budget and figuring out where all your money is actually going.
Therefore, when thinking about what to do with a large sum of cash such as a tax return, I suggest splitting it into thirds – debt payment, emergency fund, and investing in yourself.
Do You Have an Emergency Fund?
Remember the statistic from my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever that says most Americans can’t come up with $400 (cash) in an emergency? That’s why I strongly suggest you put a third of your return into a savings account earmarked for emergencies. Using my simple math skills – if you are getting a $3,000 return, put $1,000 into an emergency fund because you can’t plan for everything in life. The idea is that by having cash on hand you are going to help prevent yourself from going further into debt when your car breaks down, you’re A/C goes out, or there’s a plumbing leak at your house.
If you do what most Americans say they do and just dump the entire tax return into debt repayment, then what happens when you wake up the next morning and discover your kid broke your smartphone and you’re on the hook for hundreds of dollars to replace it? If you don’t have an emergency fund, you are forced to incur even more debt to replace the phone. You must have a phone to survive in this culture, right? This is a non-negotiable. You have to buy a new smartphone. If you had some cash available in an emergency fund you can use that to replace the phone and not fall back into the vicious cycle of resetting the debt. Think of an emergency fund as insurance against debt.
Invest in Yourself
I know how tempting it may be to blow some (or all) of your tax return money on material items you’ve been wanting like that new 80-inch, curved TV, or the latest iPhone. You might even have a dream vacation you’ve been wanting to go on. Nothing against those ideas but I think the wiser choice would be to find a way to invest in yourself. This could be attending a conference, workshop, or seminar in the field of your passion. Many universities offer continuing or professional education courses either in classroom or online. My alma mater, Kennesaw State, has a tremendous College of Professional Education that offers a wide array of certificate-based programs designed to help you advance in your career.
If you are the entrepreneurial type, maybe you are working on launching a small business or side gig and could use some money to get that endeavor off the ground. These are just a few examples of how you can invest in yourself in hopes of creating better options for your future. If you take a $1,000 class this year maybe it will lead to a $10,000 a year raise with your employer. Think long range instead of here and now.
Final Thoughts
For many of us, getting a large tax return is like winning a small lottery. The anticipation of receiving the refund generates many ideas of how to spend it. With so much swirling around in our minds it can be challenging to determine the wise way(s) to use the extra cash. I understand everyone is not in a position to disperse the funds toward the three suggestions that I offered, but I do want to encourage you to think about what the wise decision would be for you.
For more on my financial journey and thoughts from other unique individuals, check out my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.