5 Steps to put your tax refund to good use
April 17, 2023 • The Fiscal Femme
Tax season is coming to a close, which means many will soon have refunds, if not already. We talk a lot about taxes — how to file them, how to minimize them and how to plan for them, but another really important part of tax planning is making the best use of your refund.
Why? Because it’s a great opportunity to make progress towards your financial goals, which may include setting your budget up for success, or even treating yourself.
If you’ve filed and know exactly how much you’re getting back, here’s a step-by-step recommendation for making the most of your tax refund.
Step 1: Plan in advance.
If we wait until the money hits our account to make a plan for our tax refund, there’s a high likelihood it will be spent without purpose. I see it all the time (and I’ve experienced it, too!). We spend a little extra here or there, and next thing you know, the money is gone or there’s a lot less of it left to work with.
Having a plan before the money hits our account makes it a lot more likely to go where we want, in the amount we planned for.
Also, with Spruce you can get your federal tax refund up to five days early, which means you can put your money to work even sooner.
And who wouldn’t want their tax refund early?
Step 2: Make progress towards your goals.
A tax refund is a great way to put a chunk of money towards your top financial goals. Ask yourself, what goals are most important right now? Are you building your rainy-day fund (emergency fund), paying down credit card debt or want to put a chunk of money towards your IRA? Tax time and getting a tax refund is a great opportunity to do so.
Spruce offers a tax refund recommendation feature to help you put your refund to good use. After your federal tax refund arrives, Spruce will prompt you to put a portion of your refund toward savings, helping you to jumpstart your goals.
If you can’t decide on a top goal, you can also allocate a percentage to more than one goal. Maybe that means putting half towards investing and half towards your student loans.
When choosing goals, I recommend considering your motivation. Ask yourself, what’s most exciting to me? What goals will feel great to make progress on? Answers to these questions can catapult your progress.
Step 3: Treat yourself (in this specific way)
At the Fiscal Femme, we’re not about deprivation. If you typically do something fun with your tax refund, I’m not going to tell you not to. I find that when we carve out money to treat ourselves, we are actually more likely to sustain our money goals and progress.
Much like a strict diet, deprivation can backfire. It’s not sustainable and it can rob us of joy. That being said, we can be strategic with our treat. When we choose to treat ourselves with our tax refund, it typically makes more sense to choose a one-time treat versus a lifestyle upgrade that we will have to continue to pay for going forward.
Decide what percentage or amount of your tax refund you will use to treat yourself. Maybe you decide to use 10% for something fun, or that 20% will go towards your next vacation. Then use the rest for your goals (from step 2).
It’s a balance. The more of our refund we use for “fun,” the less we can put towards our goals. What’s the right balance for you?
Step 4: Write a specific recipe.
Now that you’re clear on what you want to use your tax refund for, it’s time to get specific. And by specific I mean exact numbers but where this money will be going is also important.
For example, if you are paying down debt, you can transfer the money directly to pay down your debt balance. Or if you are funding a rainy-day account or travel fund, you’ll transfer the money to those specific savings accounts.
I like to write down a recipe in this format:
- Transfer 90% to my rainy-day fund (top priority goal)
- Transfer 10% to my travel fund (fun treat!)
This way you have clear instructions as soon as the funds show up in your account. Budgeting your tax return can be a great opportunity to kick off a long-term budgeting routine. Spruce has features that help let you take control of your spending — without a lot of work to get started.
The new Spruce mobile banking app budgeting feature automatically sorts your transactions into categories so you can easily see the money coming in as well as where it is going when you spend it. You can even choose specific categories to watch closely to make sure your spending habits match your money goals.
Step 5: Execute your plans when the money hits your account.
Okay, you’re ready. As soon as the funds hit your account, you can execute on your plan or recipe that you created in step 4.
If some of your goals are for savings (like a vacation or rainy-day), Spruce allows you to create personalized saving goals or buckets so it’s clear that each dollar has a job. This works so much better than having an ambiguous blob of savings that you allocate in your head. Believe me, I’ve tried it both ways.
Once you have executed your plans, make sure to celebrate! You made the most of your tax refund and moved yourself closer to your financial goals. That’s some major financial adulting!
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