If you are expecting money back this tax season, it is important that you have a plan in place ahead of time for how you will use that money. You want to make sure that plan is consistent with your overall financial goals – and of course you want to make sure you have financial goals!
Apprisen’s website has tools that will make your work easier and faster. Visit Apprisen to access calculators and download PDF forms for free.
The first step is to develop a spending plan (also known as a budget) that details your expenses. Make sure that you include your periodic expenses (all those things that occur every year but not every month – like property taxes, school supplies, clothing, gift giving, and doctor visits). If your monthly expenses exceed your monthly income, you may have to set aside some of the tax refund just to cover basic expenses. (If you need to use your refund to “catch up” on past due bills, this is a sure sign that you need to use the refund to “pay ahead” instead.) Some people use the tax refund specifically to cover those periodic expenses so that the ongoing budget is just monthly income and monthly expenses.
If you consistently get a large refund and nothing is changing this year with your income or family size, consider adjusting your withholding to bring home more net pay. When you over withhold, you are basically lending the IRS money interest free. Many people purposely withhold too much so that they will get a bigger refund – causing themselves a monthly shortfall, falling behind on bills or borrowing the shortfall from credit cards. They then use the refund to “catch up” bills after paying late fees or to pay down credit cards used to cover basic expenses throughout the year with interest. This does not help meet anybody’s financial goals!
Once your basic needs are covered, think about savings. If you don’t have 3-6 months of expenses set aside as an emergency fund, cover that next. If you don’t have retirement savings at work, use your tax refund to open an IRA. Or consider starting a college savings plan for your children.
Many people use their tax refund for extras – some of those “wants” and short term goals. Its fine to use the refund for those things – but only if you have already covered your monthly expenses and emergency fund.