There’s nothing like receiving a huge influx of cash into your bank account. It’s exciting, a bit intimidating and, if you aren’t careful, can ruin all of the progress you’ve made to date with regard to your finances.
Tax Refunds: How To Manage The Influx of Cash
Of course, there are several great options for using your tax refund responsibly and making life easier for yourself in the future. (That’s what you really want, right?)
Option #1: Increase (Or Start) Your Emergency Fund
Increasing or starting an emergency fund is one of the best things to do with a large amount of cash. This is especially important if you don’t have an emergency fund to begin with but can also be helpful if you haven’t been able to get it to a comfortable amount. It might not seem like much at this point in time but, come August when the air conditioner breaks down or you have a tire blow out, your emergency fund will make your life so much easier.
Option #2: Pay Off Debt
If you’ve been struggling to pay off debt, getting a tax refund might just be the kick in the pants you need. By having a large chunk of money to throw at any one debt, you’ll see huge progress right away.
Personally, we’ve been working to pay down debt with a strict end date in sight. Thanks to our tax refund this year, we are going to be able to pay off two of our smaller loans and free up money to put toward a third. In doing so, we will knock two to three months off of our debt snowball, which is not only exciting but makes us even more motivated to finish strong.
Do you have debt you could be paying off with your tax refund?
Option #3: Fund Your Variable Expense Funds
One of the best decisions Justin and I made at the start of 2018 was to use our tax refund to bulk up our variable funds. We split the money among several funds including car maintenance, clothing, medical expenses, and pet care. Despite putting money into those funds each and every month as part of our normal budget, we found that a few of them had been depleted and we wanted to be on the safe side if any of those expenses came up throughout the year.
Of course, just because we had the money in those funds, didn’t mean we spent it needlessly. Much of the money is still there, waiting for the times when we really need it.
Do you have a fund that needs a little extra love?
Option #4: Stock the Freezer or Pantry
It might not be prudent to spend your entire tax refund on food, but you may want to use a small chunk of it for purpose of filling the freezer and pantry. This is extremely helpful if you enjoy purchasing in bulk but can’t afford to do that within the constraints of your monthly budget. It may also allow you to cut back on monthly expenses related to groceries and household items over the course of the year.
(Do this, and the next time someone runs a pantry challenge, you’ll be ready to participate with gusto!)
Option #5: Take on a Home Improvement Project
Want to paint the interior of your home? Need to repair your deck? Thinking of installing a new sidewalk? It might be time to consider using your tax refund for that purpose. Think of the money you could save by not having to put that project on credit! Do keep in mind the hidden expenses that can come with the DIY home renovation project, though, and don’t just jump into something needlessly because the money is available!
Option #6: Save for a Vacation
If you don’t already have a debt payoff plan or the need to save for something more important, planning a vacation for your family with the money from your tax refund might be at the forefront of your mind. Of course, it’s imperative that you consider the entire cost of the trip you will be taking, and not just the portion you will be using your tax refund for. Food, hotel stays, and trinkets can add up quickly, so make sure to take those into account.
What kind of experience (and memories) could you provide for your family with your tax refund?
Option #7: Spend It
The last option I’m going to mention today is that of simply spending the money. Of course, you can still do this responsibly by considering a large purchase you’ve been planning to make or upgrading an inefficient appliance. While those are great reasons to spend the money, I’d like to caution you that, if you are trying to make a difference for your future, there are definitely wrong ways to utilize that tax refund.
Wrong Way #1: Not Considering Need
Sure, you might WANT that new television, but it’s important to consider if you actually NEED it. You might have fun spending the money on the television but, if you are neglecting things you actually need, then eventually you’ll regret the purchase.
Consider using the money for what you need and, if you must make a frivolous purchase, give yourself a few days to consider it before you jump in.
Wrong Way #2: Replacing a Working Item
It’s tempting to replace something that’s still working with something that’s bigger and fancier, just for the fun of it. Of course, there’s nothing wrong with having a newer or better item, just make sure it’s really something you are ready to part with your money for.
If the dishwasher is still working, it might not be the best decision to replace it. In fact, by putting the money into a sinking fund for appliances, you’d instead be prepared if anything happened in the future.
Wrong Way #3: Using it to Accumulate More Debt
The absolute worst thing you can do with your tax refund is to use it to accumulate more debt. Yes, I’m talking about that new car you’ve been eyeing, but can’t quite afford. If your tax refund isn’t going to cover the entire purchase, carefully consider the long-term effects of taking on an additional line of credit.
Also – if the item you are about to purchase involves insurance, give even more consideration to how that increase might affect your monthly budget.
A Decision for the Future
Ultimately, it’s up to you to decide what you will do with that tax refund. Keep in mind, though, that despite the excitement you currently have for that money in your bank account, the choices you make with it have the potential to make your life easier in the future, if you’ll let it.
Tip: Contemplating a debt payoff plan? Check out my strategy to get out of debt quickly! (You can find it HERE.)