While most everyone looks forward to the longer-lasting daylight and (hopefully) warmer temperatures of spring, April is also the season of taxes. Tax season is generally synonymous with paperwork and stress, but the thought of a refund is reason for excitement.
A 2017 study by CNBC showed that the average Illinois resident received a refund of more than $2,800. For many, this influx of cash may make some previously implausible purchases more realistic. Perhaps that new pair of shoes? Or the new HDTV? The urge to spend your tax refund on a luxury item or “want” can certainly be overwhelming, but choosing to allocate the funds in a manner that works in tandem with your personal and financial goals can make a positive difference.
By using your tax refund strategically and effectively, you actually help to preserve and protect other important areas of your portfolio. For example, using just $1,000 of your tax refund to make a payment toward high-interest credit card debt means that money doesn’t have to be drawn from somewhere else to help cover that payment. Oftentimes, those who find themselves in debt must pay it down with funds that might otherwise be allotted to retirement, education or other crucial savings. While allocating all or a portion of your 2018 tax refund to reducing debt isn’t likely to make the problem disappear, it can help alleviate some of the burden and offer increased financial flexibility in other critical areas.
Most importantly, getting in the regular habit of applying unexpected income to specific areas of concern and need within your portfolio will help set a strong precedent moving forward and may also provide a much-needed cushion. You can never have too much in an emergency fund, so steering a portion of your refund toward emergency savings will only serve to provide further peace of mind.
Additionally, using your tax refund to supplement regular contributions to both your child’s education fund and a “sinking fund” (special savings account designed specifically to replace deteriorating assets such as large appliances) may help you keep up with those savings and more quickly reach your benchmark goals. Applying a tax refund to those savings goals that are lagging behind can help rejuvenate the accounts, while also getting you back on track.
Addressing financial concerns and long-term savings should come first, but if you feel comfortable with your current situation or have any portion of the refund left over, tax refunds offer a unique opportunity to invest in yourself. Whether it’s finally learning a foreign language or taking a long overdue vacation, don’t overlook using what’s left of your refund for personal development or treating yourself. After all, it’s not too often that we receive money not already earmarked for specific use or factored into our budget.
Whether you’ve already received that tax refund or are eagerly awaiting the check, try to avoid the immediate urge to splurge. Instead, start thinking about how you may be able to put the funds to good use for 2018 and beyond.