Excited to see that money coming into the bank account? Already thinking about how to spend it in advance?
It’s important to recognize that receiving a tax refund isn’t just a stroke of luck; it’s a sign of financial responsibility and diligent tax planning. However, it’s crucial not to fall victim to spending frivolously. Instead, view it as an opportunity to strengthen your financial foundation and set yourself up for long-term success.
Before diving into how to allocate your tax refund, it’s worth reflecting on the broader context of your financial situation.
Take a moment to assess your overall financial health. Are there any pressing financial goals or challenges that require attention? Are there areas where you can optimize your financial strategy? Understanding your current financial landscape will help you make informed decisions about how to best utilize your tax refund.
If you’re lucky enough to receive a tax refund this year, resist the urge to spend it until you’ve put some thought behind how you can make this money work harder for you (and your household) and your financial future.
Winnie Sun, Sun Group Wealth Partners Managing Partner, Gives us her top tips to get you started:
- Pay off debts! If you have debt, you want to prioritize paying this off – this year. Start by tackling any high-interest debts, such as credit card balances. Make a simple spreadsheet of all your debts and rank them from the highest interest rate to the lowest and start paying them off one by one. By not paying sky-high interest, you’re saving money, and you’re reducing financial stress which is good financial planning.
- Fund your emergency fund! You know you need one, but if you haven’t had a chance to fund it yet, this is your chance. Take advantage of your tax refund and build or replenish your emergency fund. How much should you save? I recommend aiming for about three months’ worth of living expenses. You can calculate how much this is by visiting MyBudgetWorksheet.com to download a free worksheet to help you calculate. When it comes to investing, you’ll want to keep this money safe and accessible, perhaps through a high-yield savings account or money market or even, very short-term FDIC-insured CDs. Talk to your financial advisor about your options.
- Fund Your Financial Goals! One of my favorite recommendations for our clients is to take advantage of their tax refund to fund their financial goals. Maybe it’s a down payment for a home, maybe it’s college savings, and maybe it’s investing for your future.
- Save For Retirement! Some of my clients will take their tax refund and contribute it directly into their retirement accounts, such as a Roth or Traditional IRA for the year 2024. To do this, we would open up or fund an existing IRA account for 2024. By funding it in April, you also benefit from having more potential compounded growth. There isn’t a minimum amount you have to fund these accounts which keeps them flexible, and this allows you to take advantage of the contribution limits, which are $7,000 for those under 50 and an additional $1,000 catch-up contribution for those 50 and older.
It’s important to strike a balance between responsible financial decisions and enjoying the fruits of your labor. While it’s crucial to prioritize savings and investments, allocating a portion of your tax refund towards experiences that bring joy and create lasting memories can also be a valuable investment in your well-being.
A family vacation, in particular, offers the opportunity to unwind, recharge, and create cherished memories with loved ones. Whether you’re exploring new destinations, relaxing on a beach, or embarking on an adventure-filled excursion, investing in experiences can provide priceless moments that enrich your life in ways that money alone cannot.
That being said, it’s essential to strike a balance between enjoying leisure and maintaining financial discipline. Consider setting a budget for leisure activities and ensuring that it aligns with your overall financial goals and priorities. By finding the right balance between responsible financial planning and enjoying life’s pleasures, you can make the most of your tax refund while building a brighter financial future for yourself and your family.
Winnie adds “Let’s face it, tax season is never fun, but if you get a refund, be smart. If you wish to celebrate, be smart about it and make sure you put some of the funds away for the future too. By doing so, you’ll ensure that your money not only brings you some joy but also that your money works as hard as you do.”