What will you do with your tax refund?
You’ve made it through another tax season. If you are like most Americans, you will spend any tax refund you get, maybe even before you receive the money. Killjoy Alert: While splurging may seem fun, you can better use the refund to build your wealth. And establish good money habits at the same time.
We Americans love to think about all we could buy. And our credit card debt reflects this, as the average U.S. household carries almost $8,800 in credit card debt!
We also hear a lot of those buying-stuff fantasies when lottery jackpots reach a new high. The same thing happens (on a smaller scale) with any type of windfall we receive, whether a tax refund, gift or bonus.
Even if you’re not the kind of person who makes a lot of impulse purchases, extra money can be costly. It psychologically encourages you to spend more than the windfall.
The Add-On Trap
Last year, the IRS issued over $300 billion in refunds on tax returns, at an average of $2,763 per tax filer. And 62% of taxpayers expect that they will receive some sort of refund on their 2018 returns. Most likely the expectation is in line with last year’s average refund amount.
Let’s say you are expecting a return of $2,000 (woo hoo!). What will you do? Well, you might get a new computer, but when you go to spend that money, you look at computers that cost around $2,000. Add in the extras, new software, an upgraded monitor and the protection plan, and you end up spending $3,000. If that $2,000 return never showed up, you’d have an extra $1,000 in your wallet.
Write Down Your Promise
The solution is to have a plan in place before the money appears. How much will go to essentials, like saving or paying off debt? How much will you consider “found money”? (even though it’s your money, the IRS has politely held onto it at a 0.0% interest rate).
If you limit the spending percentage, you help yourself in several ways:
- By paying down credit card debt, you can lower the amount you have to pay every month;
- By having a planned, fixed amount to spend, you’re less likely to overspend; and
- By having a plan, you’re more likely to put the refund where it’s most beneficial to your needs and goals.
Once you’ve made a plan, write it down. Psychologically, you are making a contract with yourself. People who write down their plan are more likely to follow through with it, and less likely to make impulsive decisions. The added benefit of this process is that it helps you change your spending and saving habits.
Over time, these small, smart spending decisions will add up. You’re positioning your future self to have the money needed to do what is most important to you!
Now when you get the $2,000 check, thanks to your smart planning, you will end up thousands of dollars ahead of where the non-budgeted old you would have been.
Are you getting a tax refund? What are you going to do with it? Let me know what you’ll do!