Tax day is in just a few months for us in the United States. Every year, around this time, we start to see the arrival of tax related posts on our Facebook feeds, Twitter, and Instagram accounts. Social media is ripe with everyone updating and uploading photos showing off all the amazing new “stuff” they got with their tax refund.
Some folks get a new car, they go on fancy family vacation (think Disney or a cruise), they do extravagant home renovations, they buy new furniture or appliances… things that they likely couldn’t have otherwise afforded. And I say they probably couldn’t otherwise afford these things is because the tax code in the US is written as such that the biggest tax returns go to those with the lowest means. If you have a high income, you don’t get much back, if anything.
So, for many families, tax time is the best time of the year. They’re on Facebook sharing pictures of that all inclusive Disney cruise, or the new car they just leased. Many of them are making the same common mistake. They are are spending the money that they would do much better to save.
Yes, I get it. When you live on a modest income a windfall like that is very tempting. You can easily rationalize that you NEED a new minivan or washer and dryer set. You can easily rationalize a Disney vacation because your kids seem like the ONLY kids who haven’t gone right?
Saving just isn’t as fun as spending. Saving is the boring option. But what if I were to say that saving your tax return money each year, instead of spending it, can set you up for opportunities to stop living paycheck to paycheck, not worry about bills so much anymore, and have more spending money throughout the year?
Tax time self control can set you up for long term money success. Let’s pretend you are a family of five and you get a $2,000 tax refund each year. Many, many families see 2 to 3 times that amount but we will go low for this exercise.
That $2,000 could pay down debt, helping to eliminate interest rates you are paying, or even help you pay off your current vehicle a couple years faster, eliminating a car payment altogether. You could get off the credit car interest train. You could pay down the principal on your mortgage, or your student loan.
If you have medical or collection debts you can make a cash settlement offer and save some money that way. If for instance the bill on your child’s ER visit was $3500 and you don’t have the money to pay it, offer them a $2000 payment if they agree to settle and close the debt. They are almost always willing to bargain and you save money because you had a lump some to offer them.
If you have no debt, you could invest the money. If you start an investment account with your $2,000 and add the same amount to it every year at tax time, with a modest 6% annual increase you will end up with almost $30,000. That is a $10,000 gain.
Other ideas include pre paying bills like water or electric to give you more cushion during the year. You could take advantage of discounts offered for annual or quarterly payments, such as the discount you may get by paying your car insurance on a semi-annual rather than monthly basis. You could pay off your mobile phone contracts and see a decrease in your monthly payments. You could buy into a herdshare or farmshare, prepaying for the groceries and food you will be consuming throughout the year, giving you more money to play with in your monthly budget.
I think you might agree that it can be worth the time and energy to think about ways you can save tax refund money. Doing so can be an investment in your future financial success. Sometimes the best way you can spend your tax refund is not to spend it at all!