The 5 Questions You Need To Ask When You Get Your Tax Refund

by Chris Tecmire

Stacks of Money

 

Don’t you just love this time of year?  Spring is my favorite time of the year, bar-none.  Summer and fall have their pros and cons, depending on where you live, and I pretty much despise winter (I live in Northern Michigan).  But spring is fantastic in every way.

 

First of all, I was born in May and I was married in May.  That’s a good start.

Spring is obviously when hope finally arrives for those stuck in the northern climates.  The temperatures begin to warm, the sunshine returns, and the trees and flowers begin to bloom.  All of a sudden, almost overnight, color is everywhere.  Bright greens, yellows, and reds replace drab white and grays.

For the sports fan, spring means March Madness, the NBA and NHL playoffs, and the start of Major League Baseball.  Better yet, you can actually go outside and participate in the sports you love again.

But maybe the most glorious part of spring is that we get our tax refunds back!  Yippee!  “Extra” money!

 

There’s something pretty magical about finding money that you didn’t know you had, whether it’s a dollar or a thousand dollars.  We’ve all stuck our hand in the pocket of a coat that we haven’t worn in 9 months only to discover a dollar or two.  What happens?  Our eyes sparkle, we smile big, and we have an extra spring to our step that day.

It’s only a buck, but it doesn’t matter because it’s a dollar that we didn’t have a few minutes ago.

So, in that case, tax refund season is especially fun.  According to the IRS, the average American federal tax return is $2,902.  (IRS.gov)  That’s like finding a dollar in your pocket every day for the next 8 years!

So, the question remains:  What do we do with all this “extra” money?

 

The 5 Tax Refund Questions

 

1.  Do I have any responsibilities that need my attention?

Just because you get it all in one big lump sum doesn’t mean that it’s “extra”.  In reality, this is just like any other form of cash – it needs to be spent properly.

Not sure how to answer this first question?  Let me ask a few more.

  1. Do you have any past due bills that are still not paid?
  2. Do you owe anyone money?
  3. Are there any large bills on the horizon that may be difficult to pay without this money – medical bills, home repairs, etc.

If you answered “yes” to any of these questions, you know what you need to do.  If not, let’s consider the next question.

 

2.  How’s my debt situation?

“Extra” money is the perfect time to punch debt in the face.  You could take a trip to Disney World or you could eliminate a credit card or two.  I know you’d rather go on vacation, but the credit cards are costing you a bundle each and every month in unnecessary interest.  If you can get rid of those cards today, tomorrow you can start saving the money you would have had to spend on interest and still go to Disney World soon enough.

Debt of any kind is best when it’s dead.

 

3.  Could my savings account use a bit of a boost?

A healthy savings account is exactly the kind of peace of mind that we’re all looking for.  It’s nice to know that you have a plan for the tough times that most likely lie ahead.  If you don’t have at least 6 months of income in an “Uh-Oh account”, you may want to reconsider. 

Working at a bank, I’ve seen far too many people who went from “I’ve got plenty” to “I’ve got nothing” within the span of a year or two.  Many of them were living large on very healthy incomes, but didn’t put much of it away.  They were essentially living large paycheck to large paycheck, so they were toast as soon as the “large” switched to “small”.

 

4.  What would be the most fun?

I firmly believe that it’s an excellent idea to spend a portion of your extra money on something fun.  In fact, the only people that I would advise not to do that would be those who answered yes to question #1.

The real question is how much of the money should be alotted to “fun”?  Here are my thoughts based on your specific situation.

 

If You’re In Excellent Financial Shape

If you are debt free, and your savings account is in good shape, then I guess that’s up to you.  Maybe this is your chance to take a trip, buy something you’ve been eyeing for some time, or consider question #5.  My only advice is to still exercise some restraint.  Maybe only spend 70% of the refund.  It’s a good habit to form a great chance for parents to teach their kids a lesson in self-control as well.

If You Have Some Work To Do

If you still have debt to pay off and your finances are ok, but you still have a ways to go, decide on a much smaller percentage.  Make sure you set up a rule to use in the future too.  The danger of not having a set percentage is that you will mold it each year to whatever goody you’re drooling over.  Maybe this year you only need 20% of your refund, but next year you might change it to 80% because Maui ain’t cheap.  Set a rule now and stick to it in the years to come.

I feel setting aside 10 – 20% for “fun” is a good standard for those with a little work to do.  That way you can experience the excitement of “extra” money, but are still able to take a leap forward to your ultimate goal of financial freedom.  Not to mention, when you consider the ramifications, paying off debt or building your savings account can be just as exciting as buying a new gadget or heading out on a weekend trip.

If You Have A Lot Of Work To Do

If you have a bunch of debt or a tiny savings account, I would recommend treating yourself to a nice dinner and stopping there.  Allow yourself to celebrate, but don’t go crazy, because you have an opportunity to get closer to your financial goals.  Don’t miss it.

 

5.  Is there someone or some organization that could use my help?

Setting aside a portion of the money, or all of it if you prefer, for someone less fortunate is an important step that you won’t want to forget.  I know you want a new 3D Plasma TV, but what about setting aside part of that money for someone who legitimately NEEDS it.

This is not supposed to be a guilt trip – I’m certainly not perfect in this regard either, but I think we all agree that we focus on ourselves an awful lot.  This might be a chance to focus on helping someone else out.  There’s very little that rivals the feeling of truly helping someone who was searching for help.

 

Finally, remember that “extra” money is not actually extra at all.  All of your income, no matter its source, is of use in your goal to be debt free and financially free.

You’re trying so hard to be smart with your money.  Extra income isn’t your chance to be a fool…but don’t forget to have a little fun while you’re at it.

 

Image: sheelamohan / FreeDigitalPhotos.net

 

{ 3 comments… read them below or add one }

Dave Wisniewski April 11, 2012 at 12:39 pm

While it is nice to get this once per year windfall, financially speaking it would be better to not have paid the excess taxes and had the cash in your pocket (better said.. bank account..) during the year. An interesting follow-up article might be how to evaluate and potentially adjust your W-4 withholding.

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Chris Tecmire April 11, 2012 at 6:31 pm

Great point Dave. For anyone who would like to do that, google IRS Withholding Calculator and you’ll find what you’re looking for. Though I’m fully aware of the benefits of having the money throughout the year instead of in the form of a return, I actually prefer to get a return for a couple reasons that I won’t get into right now. However, for those who need the money throughout the year to pay bills, fill their 401K, or invest in the market, making sure that your W-4 is as efficient as possible is a good idea. Thanks for the insight.

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Cedrick Debaets May 12, 2012 at 12:09 pm

I don’t even know how I ended up here, but I thought this post was good. I don’t know who you are but definitely you’re going to a famous blogger if you aren’t already ;) Cheers!

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