When February rolls around, people begin to anticipate their tax refunds. Many want to spend the extra money on frivolous vacations and other impulse purchases. Since seven out of ten people get refunds, it’s easy to see why so many companies have significant sales to increase their revenues. Rather than focusing on spending, use the three-step method: spend some, save some, and invest some. It’s not far as glamorous as a trip to the tropics, but it can help keep the finances aligned for the rest of the year. Here is a simple guide to tax refund spending.
Indulge A Little
The average tax refund is $2,800. For many, this is the largest sum of money they will get all year. Rather than having the mindset that a person won the lottery, only spend about 25 percent. The money is not a massive winning as it’s funds that were worked for during the previous year. It’s nice to indulge in small things to make a person feel better. If things are kept in perspective, a little indulgence never hurt anyone. Though, buying a pair of shoes that you might wear often might be a smarter splurge than that designer pair of Jimmy Choo shoes for bragging rights.
Take Care of Mounting Debts/Household Needs
Tax refunds are a great tool to help reduce debt. Paying down those credit cards and personal loans can help to reduce anxiety too. Many use the funds to get caught up on utility bills and to take care of repairs and maintenance around the home. Is it time to upgrade old appliances? Just think, replacing those old, energy-hogging appliances can save money too. Spend the next 35 percent of the refund check reducing debt and taking care of things around the house.
Invest In The Future
Always look ahead to the future when it comes to finances. Set goals and prepare for the next year and beyond. Why not put more money into the 401k account or invest in an IRA? There are numerous ways to invest, and there is no better time than the present. Remember things like college educations, retirement, and other costly items. Putting a chunk of the tax money on these things each year can add up quickly. Around 40 percent of the refund should go towards investing.
Every situation is different, and the needs of the family come into play. Remember, there is no exact science when it comes to spending the refund, but it’s essential not to struggle the rest of the year with funds. The refund money can be used to ensure that finances are not a source of high anxiety for months to come.