That’s what people often think when they get their tax refund. Only it’s not really free money. It’s money the government took out of your paycheck last year. And Uncle Sam took out a lot. The average refund topped $3,200 in 2015, according to the IRS.
So how should you treat that extra money? Just like you would a regular paycheck. After all, that’s where the cash came from, right? Depending on your financial situation, there are some smart moves to make.
1. Adjust your withholding. If you got $3,200 back from the government, you need to go to your company’s HR department and adjust how much money is taken out of your paycheck each month. That way the government doesn’t get to keep it all year! (Be sure to consult with a tax professional to be accurate.)
I’d rather you give less to the government every paycheck and instead put that money toward investing every month. That money, when saved over the long-term, could make a huge difference in your financial future!
2. Splurge a little. Yes, I’m giving you permission to splurge—a little. But how much you spend will depend on where you are financially. If you’re trying to get out of debt, spring for that special coffee you love. Then get back to the DEBT ATTACK! If you’re already living your dream retirement, you can splurge more. The key is to be wise with the money.
3. Pay down debt. Getting rid of those bills doesn’t feel like a fun way to spend a tax refund, but you’ll love the freedom that comes from not paying 20% in interest every month. Believe me, there’s nothing quite like writing that last check, knowing you don’t have to do that ever again!
4. Save it. Do you have an emergency fund that will cover three to six months of expenses? If not, your tax refund could go along way in putting some distance between you and Murphy’s Law. If you already have an emergency fund, there are lots of other reasons to save the money—car repairs, dental exams or upcoming vacations, for example.
5. Buy something you need. If your refrigerator has spit out its last ice cube, you could use your tax refund to get a new fridge. Before you buy, though, do your homework. Find out when and where the best deals are. Just because the big box stores do big business doesn’t mean they offer the biggest discounts. When you go, take cash and do a little bargaining. Even refrigerator prices are negotiable.
6. Invest it. You’re going to make adjustments to your withholding so you can invest more money in coming years, but you can also invest this year’s money! You can talk with an investing pro and put that money in a Roth IRA.
Even if you invest only a little bit, that money will grow tax-free and you won’t pay taxes on it when you take it out at retirement. If you invested $2,000 now, in 30 years you’d have $56,000—and that’s if you only do it once! That could pay for a lot of necessities—or dreams—in those retirement years!
Remember, a tax refund isn’t free money. It’s your money—and you worked hard to earn it. So don’t waste it. Look at your financial situation, talk with your spouse or a friend, and be smart with the money. It could make a big difference in reaching your retirement dream!