Getting a tax refund can be a great thing or a bad deal depending on whom you speak to. Financial Samurai was sharing his take on tax refunds and I agree with him. While some may complain you’re giving the government your money interest free, if the alternative is you spending the money on frivolous things , then it’s worth having it in a lump sum. For some people, having a tax refund motivates them to spend their money a little more seriously.
Consider using your tax refund to build your finances.
Maximize Your Tax Refund’s Potential
If you’re getting a big refund, look at it as a chance to improve your finances with a big shot.
Create a bare bones emergency fund. Before you do anything else, you should have a barebones emergency fund. How much is that? For most college students and new graduates, I say it’s somewhere between $500 and one month’s worth of essential expenses. You can build it up through out 2010 with automatic deposits.
Pay off a high interest credit card. If you’ve created an emergency fund and have some money left, then go ahead and pay off a credit card if you can or at least pay a big chunk off. Even if you only manage to pay off a small store credit card you’re giving yourself a big win. You can work on your debt snow ball during the rest of the year.
Deposit the remainder into a Roth IRA. Why should you care about a Roth IRA while you’re in college? Starting an IRA even with $500 has some big consequences thanks to the power of compounding interest.
Spend 20% on What You Want
Despite all the smart financial choices you can make, it doesn’t mean you can’t have some fun with it. You should keep 20% for yourself. The catch is you have to wait a month before you use it. Why?
Waiting at least a month can give you time to really figure out how you want to use the money. Do you want to travel? Do you want to save money for a TV? Do you want to donate that money to a charity or a family member dear to you that‘s in need?
Only you know what will give you the most fulfillment. Just don’t squander it away quickly.
Your Take
Which method do you prefer? If you like receiving a bigger tax refund, how do you spend it? What advice do you have for the size of a bare bones emergency fund?
Photo Credit: NickStarr
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I have received tax refunds over the past 2 years and put it straight to the bank. With no debt other than a car payment, I would rather try to maximize my Roth IRA earlier for the year and then can concentrate on other things. I do like your approach to spend a little, may treat myself to a big dinner.
I’m glad you’ve been responsible with your tax refunds. Our plan is to pay down mortgage with most of the refund.
I think a bare bones budget should be 1,000-1,500. I like the idea of a percentage for fun. 20% or less for fun is good if you’ve got a lot of debt. Good post.
I like getting a large refund because I know myself and I would waste it and not put it to good use so it is worth it to me to give the government an interest free loan while they force me to save up. I take the refund and use a small amount for fun or big purchases, use some to pay stuff off, and the rest I put in my emergency fund.
I think it’s alright to spend some money on fun; as long as you don’t get ridiculous. Having some money going towards your emergency fund is a smart move.
I love my tax refund. I realize I’m not disciplined enough to save as much as I should, or more than what I already save.
Same here FS! We just want to make sure we’re wise with our money.
Last year was the first time I made a conscious effort to determine how much I would get back come tax refund time, and I attempted to minimize my refund. I still need to find out what I can expect to receive; bouncing from job to job makes it tough to keep track of how much you’ve paid in taxes versus how much you are due.
I for one would much rather increase my 401K deduction increase my deductions at work and get more gain out of the money than get a big refund check. One year I was claiming 20 deductions but with bonuses and overtime I still got a small refund. (I had seven dependents)
Tax refund? What’s that?! I’d rather have a refund than pay, which never happens to me. I think the perfect thing would be to have paid all my taxes with nothing owing in either direction.
@SF: That’s the best option to not owe and keep your money with you throughout the year if you have great money management skills.
I tend to live a bit like a pauper so I like keeping my money right away and investing it so I gather more time value of money. However, I agree with Samurai’s take that the vast majority of people should allow the government to withhold it until tax time.