Hey everyone, it’s Finance Fridays again. Tax day is coming closer and I think some have already received their Tax Refund. Now, what should you do with your refund?
For some of you, you may owe some taxes. However, for some of you, you may be getting a refund. I’ve talked about Taxes a good amount before:
- Taxes and Tax Withholding
- What is a 1031 Exchange?
- Taxable Accounts
- Being Tax Efficient
- **529s and the New Tax Law 2018
Moving on, if you’re receiving a refund, the question people ask is: What should I buy with it?
Or if you tell your friends “I should get a refund this year.” Perhaps their first question will be “What are you going to buy with it?”
So today, I’m going to ask you to think about it differently.
Yes. Very similar to my prior post about Extra Money in February, I want you to think differently.
Don’t buy anything with it. Pretend it doesn’t exist.
Whenever we get some extra money we didn’t think we’d have, the first impulse is to spend it. It probably has to do with some feeling of delayed gratification, or “I’ve earned this”, or “I deserve this” or something. In general, I think it’s better to not think of your Tax Refund or any extra money you receive that way.
If you have other priorities to attend to, then the extra money should go there first.
- Credit Card Debt
- Student Loan Debt
- 457 (if available)
- Backdoor Roth IRA
- Taxable Account
- Other Investments
Assuming the first 5 above are all taken care of, then you can consider the money truly “extra”.
Ok, so it’s extra, what should I do with it?
However, that doesn’t mean you just go blow it on a down payment on a new car. If you do that, you’ve basically taken your extra money and converted it into a new monthly liability. Of course, if you actually do need a car then that’s a different story. I needed to buy a a car when my in-laws came to live with me, so I bought a used car and it’s served me well. However, since I budgeted for the car, which was modest, I paid for it with cash, so it wasn’t a monthly liability.
I’m all about buying experiences, as you guys know. Using your tax refund to jumpstart budgeting for a family vacation is a great idea in my opinion. Of course, this is just another form of delayed gratification because now you have to plan for vacation and set aside time and money to do it. Unfortunately, there is no instant gratification in the advice I am providing.
If you’re like me and you’re behind on your kid’s 529s. Think about splitting up your tax refund and just dumping some extra money into their accounts:
- What is a 529?
- Choosing a 529
- Let’s Talk About 529s
- My 529 Allocation
- Let’s Talk More About 529s
- 529s and the New Tax Law 2018
That’s part of my plan for 2018, combined with small salary increases and decreases in child care expenses, I can put more money into their 529s.
This is boring of course, but I can’t think of many things that are as important as an investment in the education of my children. The burden of student loan debt is not something I want them to shoulder, if I can help it and have the means to do so.
But… I want something now.
I understand. But when you want something now, it’s probably not a great decision and the likelihood is it was not a worthwhile buy.
Ask yourself this: If you didn’t have this tax refund, would you still buy item X?
If the answer is no, then you bought this item because you had extra money, not because you really wanted or needed it. Don’t let a unexpected influx in money change your spending habits.
Wait, what are you doing with your tax refund?
Well, my tax refund this year is actually a pretty good amount since I am getting the federal/state credits for my solar panel. To be honest, in 2017 we’ve been running pretty lean in order to buy for the panels up front. At some points I was little concerned about us dipping into our emergency fund a bit and the California Family Trip of 2018 ended up going overbudget just a little. However, because of how much fun the family had, I wouldn’t trade that experience for anything. Of course, after coming back the AC in my in-law’s bedroom decided to stop working randomly, so we had to dig a little deeper to replace that before summer. However, that’s what an emergency fund is for right?
After looking at our expenses, I’m probably going to reduce our emergency fund slightly this year since our liabilities have gone away or decreased. For example, my 2012 Rav4 is finally paid off and the kid’s child care expenses have gone now. Kylie also starts kindergarten in August, so her child care expenses will decrease significantly.
So what to do with the tax refund then?
All that said, I’ve turned my attention toward our house. It’s a good house, but it was built in 1992 and I think this year will be a good time to start fixing some things. The wrap-around lanai, while nice, is all wood, and it needs to be repaired, and maybe even renovated a little. If we can afford it, I’d also like to repaint the house since it still has the original paint from 1992. The paint itself doesn’t look bad, but because we’ve recently added the new roof and the solar panels, I’d like new paint on the house. I want to do these things before they become problems, if possible. Then we’ve move into fixing things inside the house, such as updating the bathrooms and the kitchens —- but that is probably farther into the future.
I’m also going to set aside some money again for another (smaller) family trip this summer. My tentative plan it to just to go visit Maui for a few days or something since it’s just a short plane ride away. My wife has never been to Maui and I haven’t been there since back in 1990. I do remember really liking it though.
Long story short, I’m not buying any particular thing with my tax refund.
All of things above are what I consider to be investments, whether its in my children’s education (529s), house (home improvement), or life experiences (another family trip).
Don’t just impulse buy a thing with your tax refund. Have a plan for it.
For me, it’s 529s, home improvement, and another family trip.
I consider these to be investments — not purchases.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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