Who doesn’t love receiving a pile of money? Big amounts or small, a short stack or a huge pile—we all partake in the labor of paying taxes in the hopes of receiving our own cut of the tax return pie. Regardless of the size of the return, those of us fortunate enough to recover one are always forced to consider: “So what do I do with it?”
The temptation that is presented from this “gift” of seemingly free money is to celebrate its arrival with a frivolous purchase. You worked hard all year, so why not treat yourself to down payment on a new car or a plane ticket to Amsterdam? Suggestions on what you should be spending your tax return on are everywhere, but deep down, you know what you really should be doing with it. Below is a breakdown of what successful people would call “responsible” ways to spend your tax return here in 2016.
Spending tax returns on that “special something” that you have had your eye on for quite some time is the most common way returns are burned up. New Xbox’s, pre-paid bar tabs for the next year, and new patio furniture are just a few examples, with others spanning from a new wardrobe to even a new exotic pet. Although it seems like a great way to utilize this surplus of cash, it’s actually pretty harmful in terms of the long run (Do you really need a third Xbox?).
At the very least, don’t touch it. Deposit the tax return into your savings account and leave it there as if you never got a surplus to begin with. If you are making enough money to file taxes to begin with, then chances are you are old enough to know yourself well enough to know whether or not you will spend it wisely or not. If you don’t know what to spend it on other than frivolous and short term purchases, then drop it into your savings account and let it stay there where it is safe from your quick-to-spend hands and can accumulate growth.
Pay off credit card debt
For those of us who use our credit cards more often than we would like to admit, a tax return is a golden opportunity to either wipe out our debts, or at the very least soften their grips on us. Using the tax return on credit card debt (or any debts, not just from credit cards) is a smart move to make because you are not losing any of the money that you currently hold in your account. So instead of fretting over how you are going to have tighten your financial belt over the next few months (or years) until you get that debt paid off, think of your return as a guardian angel swooping in to relieve you of a good portion, if not all, of your debt.
Build or rebuild an emergency fund
Checking accounts are for purposeful spending such as bill payments, savings accounts are for long term spending on big ticket items such as a new house or a new car or even a new wife, and an emergency account is just for emergencies: Medical bills, car repairs, or an emergency suit replacement purchase in an airport J. Crew. Situations that you cannot prepare for happen all the time, and having an account dedicated to just these kinds of occurrences is what every responsible adult needs in their repertoire.
At the very least, moving a sizable portion of your tax return into an emergency fund is a wise move because when something goes wrong, why wipe out your existing accounts or even plunge yourself into unnecessary credit card debt when you can just use a specially designated emergency fund? Either create one or refill an existing emergency fund with your tax return. You’ll be happy you did.
Start saving for retirement
Planning for your retirement is an overlooked way of utilizing your money, especially for younger paycheck earners. All based around how much tax will be removed from the saved accounts, 401K’s, HSA’s, and IRA’s all are ways that you can make your money pretty much exempt from future taxes when you finally start to withdraw them from their accounts come time to retire. You may not feel that you will need that much money to spend on medical bills, but when you get older, you’ll be glad that you set up an entire account like an HSA because now, all the money that you spend on medical is for the better part tax free.
It is retirement plans like these that are overlooked by young money makers because in the present times, there are no pressing needs that require thoughtful planning for their cash long term. Using your tax return as seedling funds for your retirement accounts is small price to pay in the long run. Plan ahead, and you can never go wrong.
Putting your tax return in a position to work for you is what any financial expert will tell you to do. Investing in a business has potential to double your invested money, or even triple it, depending on the business, the opportunity presented to you, and how long you leave your cash with them.
You can also invest your tax return in stock options. Stocks, bonds, and individual shares are great ways to use your tax returns wisely, because if you don’t have the opportunity to get in on the ground floor of a business, you are never too late to get in on the action. Just remember that you don’t get astounding returns on your investment overnight.
For those of us lucky enough to receive sizable tax returns, the danger is to think of them as bonus paychecks. Not that there is anything wrong with treating yourself to a little something after working hard all year from what is left over of your taxes, just try not to blow the entire return on impulse buys or things of the like.
Use the tax return (or at the very least a portion of the return) as a seed to invest for the future. By using the funds from your tax return, you aren’t put out on anything by investing it because before you filed your taxes, you didn’t even know how much money you were missing out on. So before you start spamming the “One-click Purchase” button as you go down your Amazon.com wish list, take a second to evaluate whether or not your tax return is being spent as wisely as you know it could be.