It’s that time of year where there seems to be a dancing statue of liberty on every street corner. That’s right; it’s tax season!
Hopefully that is a good thing. If you’ve been diligent with your income over the past year, you’ll roll through this month without a large tax bill. You might even have some extra cash coming your way!
So what do you do with that big tax refund? It can be really tempting to splurge on something you’ve had your eye on, or take a big vacation.
I’m not saying those are bad things to do. In fact, I’m a huge believer that we should enjoy our money. I also think it's important to stop and consider our options before we make it rain.
What else could you use that money for? I've got a few ideas.
Use it to Pay Down Debt
Sounds exciting, right!? Yeah, not really.
Look, I totally get it. It sucks to get a big check in the mail just to send it to your credit card company. You worked hard for that money! Why should you give it all away so quickly?
Look at it this way. Our income tax returns are usually viewed as “bonus money.” I know I don’t count on that money as part of my income. Anytime we receive a tax return we are happy! That’s why using this money on debt is a lot less painful than money you were counting on. Since you didn’t plan on this cash, you won’t miss it if you just toss it on your debt.
Use it to Build Your Savings
Is your emergency fund in a state of emergency? Do you have enough cash to cover yourself if an emergency arose?
This could be a great time to beef it up! Take that check from the IRS and deposit it into your rainy day fund. Even though you won’t get to spend it on something fun, you will get to keep that cash. That means you can open your bank account and admire it any time you want!
So how much should you have in your rainy day fund? Consider 10-15% of your annual income (or 3-6 months of living expenses).
Use it to Invest in Yourself
Your debt is gone and your emergency fund is full. Now what? One of the best investments you can make is to invest in yourself (I’m starting to sound like the inside of a Dove chocolate wrapper).
As cliché as it sounds, it’s a very true statement. Doing things to improve ourselves can yield huge financial results. The more we grow the more value we can bring, which usually means a higher income.
So what could you do for yourself? Is there a class you’ve had your eye on? A gym membership you’ve always considered? Some books you’ve been wanting to read? What about (dare I say it?) hiring a financial coach to help you reach your money goals?
Take some time to dig deep and find ways to invest that money back into yourself.
Adjust Your Withholdings
So we’ve talked about a few ways you can use your tax return. Now let’s talk about what you can do moving forward to save money every month.
A tax return is the government returning the amount of money that you overpaid in taxes the previous year. That means every month you’re sending money to the IRS, letting them hold it for a few months, only to get it back in April. That’s why it’s called a tax RETURN or a tax REFUND. They’re giving you your money back!
What if you adjusted your tax withholdings from your paycheck? Consider changing the amount that is taken out of your check so that you have more cash flow. What could you do with that much extra cash each month?
Before making any changes, I recommend speaking to a tax professional. While I’m all about personal finance, taxes are complicated and I’m far from knowing all the ins and outs of the tax world. Not to mention every situation is different and should be handled differently. A good CPA will help tremendously in deciding how to adjust your taxes moving forward.
I hope this tax season is good to you! If you find that you owe a bunch of money, make some changes now for next year so that you’re not caught off guard.
If you’re ready to invest in your finances and break free from the paycheck to paycheck cycle, I’m here to help!