It’s that time of year again. The snow is melting, the daffodils are popping out — and you’re getting your tax return back! Finally, all the great ideas you’ve had all year that started with, “If only I had the money for…” can now be realized. Except…what are all those great ideas? Lots of people have thoughts of what to do with that extra surplus of income, but there are ways to be smart with your tax return.
Making good financial decisions can seem like a boring, adult-like responsibility, but using all (or part) of your refund can be a good decision. Here are three ideas about what may not be the best way to spend your tax return dollars, and some alternatives that might just make the decision-making process a little more fun.
Don’t: Save It for a Rainy Day (in a Mason Jar)
While saving is a great idea for any extra money that comes your way, sticking it in an envelope inside your sock drawer isn’t the best way to do it. While you have the money in a (relatively) safe place, it isn’t doing anything else for you — like compounding interest and making you more money. One of the best ways to spend your tax return is investing it in your retirement account.
Instead: Talk with a financial advisor to find out what options you may have for saving your money in a fund or account that will accrue interest. Many retirement savings fund options exist, including 401(k) funds, IRAs, mutual funds, annuities, and more.
Don’t: Spend it on Impulse Buys
Flying to Vegas and catching a big-name show sounds like a lot of people’s idea of a fun, impulsive weekend getaway. However, the impulse buy can sometimes cost you more in the long run. Going into more debt to go on vacation or to a fun event isn’t anyone’s idea of a good time. Splurging on a concert might be fun in the moment, but those VIP passes may not bring you the most bang for your buck. Figure out how you can budget your tax return ahead of time.
Instead: Plan ahead. Decide ahead of time where you’ll spend the money: on some valued time away, a special event, or even on a big-ticket item you couldn’t normally afford. You’ll enjoy the whole experience a lot more, knowing you planned for it and can afford it.
Don’t: Put Every Last Dime in the Same Place
Having a tax return can seem like you won the lottery — and even most lottery winners will tell you they don’t spend all the money on just one thing. It might seem like that big screen TV is waiting for you, but working on several financial goals first may be the best way to spend your tax return.
Instead: Diversify your tax return. Looking at the big picture and greater good of your financial future, there may be several options you can implement to help stretch those extra dollars. Consider splitting your tax return between some of the following:
- Putting some of the money toward a large purchase or upcoming expense, like an appliance or a wedding
- Contributing to home renovations, which could improve the value of your home
- Adding some to a retirement fund like a Roth IRA, which will give the interest accrual process a little boost
- Buy a life insurance policy that will help give you and your family some peace of mind
- Building up your emergency fund
There’s no hard and fast rule when it comes to spending your tax return. It can be a really fun bonus to your budget, but it could also help you get a little closer to your long-term goals if you use it well. If you would like some ideas on how to create a plan to help you meet your financial goals, contact your Farm Bureau agent or advisor today for more information.