If you’ve already filed your taxes and received your refund, you might already be thinking of ways to use that refund. Save it? Pay down debt? Book a summer trip?
All of the above could be the right answer depending on your situation. Here are some tips for putting that money to the best possible use in 2022:
Avoid impulse tax refund spending
If you received a tax refund, then you might already be imagining different ways to spend it. There’s nothing wrong with using that money to fund a vacation or work on a home improvement project – as long as it’s intentional and well-thought-out.
The truth is, we’re still reeling from a global pandemic and record-high inflation, so that money may very well be used in more practical ways, like padding your emergency fund.
The key is to look at your budget, your accounts and your goals for the year. I usually tell my clients to save 90 percent of their refund, and then take 10 percent to do whatever they want with it.
Regardless of what you decide to do, try not to let that money sit in your checking account. You’d be surprised how quickly it can be spent on small expenses. Try to come up with a plan for every dollar of your refund.
How to save your refund
If you’ve looked at your accounts and have decided to hang onto that money as an extra cushion, there are some good ways to do that.
First, look at your emergency fund. I typically recommend saving three to six months’ worth of expenses in an emergency fund. After the past couple of years we’ve had, I think many of us could use a little extra money for emergencies.
Another option is paying down debt, especially because we’re going to see an increase in interest rates this year.
You could also save your refund money for upcoming expenses. Maybe you know you’ll have to replace a major appliance soon, or you have a child getting ready to head off to college. You can save that money into a high-yield online savings account to prepare for that expense.
Finally, you could also use your refund to increase your retirement account savings, 529 plan savings or other long-term savings. It might not be the most fun choice, but if you put away a little extra every year in these accounts, that money can really add up over time.
How to spend your refund
If your savings goals are met, there are other options for spending your tax refund in smart ways.
You can put that money toward something enjoyable, like a home improvement project or a vacation. Again, there’s nothing wrong with spending money on things that are fun – as long as you’ve planned and budgeted for them.
A note about refunds
Getting a tax refund can feel like extra money or a small windfall, but realistically, a refund isn’t necessarily the goal. If you’re getting large refunds each year (more than $5,000), it can mean that you’re withholding too much during the year, and getting it back after you file your taxes.
That money would likely serve you better throughout the year than it could in one lump sum. Take a look at your withholdings and see if you need to make any adjustments for next year.
On the flip side of that, if you owed more than $5,000 on your taxes, you should look right away at adjusting your withholdings. If you’re a business owner, you might need to be making quarterly estimated tax payments to avoid getting a penalty payment.
You can read more about quarterly taxes and their deadlines at the IRS website.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.