Tip Content Provided By: Tania Brown, CFP, Financial Finesse
I was hanging out with a friend last week when I noticed that she had an unusual amount of magazines and sales ads around her. Knowing that she is one receipt away from being a shopaholic, I asked her what was going on.
She told me that in anticipation of her the tax refund she thought she was going to get, she had started creating a list of the things she was going to buy. I mentioned her New Year’s Resolution to save more money and pay off debt and reminded her that the refund can serve a greater purpose than buying stilettos. Maybe she needed to put the catalogs away, but let’s not go to extremes.
There are ways to use your tax refund to achieve your goals while also having some fun. Here’s what I suggested to her:
- Give yourself permission to spend (with limits). I told her to give herself permission to spend a percentage of her tax refund. Because she had practically nothing in savings, I suggested limiting her spending to only 10% of her refund.
- Save some. I know it may seem counter-intuitive to someone paying off debt, but put some of the money in savings. When I talk to people who cannot seem to get out of the cycle of debt, I find this is the stumbling block. If you do not have at least $1,000 in emergency savings, you are just one unexpected financial need away from getting kicked back into debt.
- Pay off debt. Finally, yes, you should use some of it to jettison debt a little faster. What’s the best way to pay off debt? The best answer I have to offer is the method that you will stick to until you are debt free. If you feel defeated and need quick wins to stay motivated, pay off the lowest balance first (an exception to this is taxes – always pay past due taxes first). If you want to save the most money on interest, pay off the highest interest rate first. Use a Debt Repayment Calculator to come up with a debt repayment game plan.
Taking a balanced approach to spending an anticipated refund gives you some wiggle room to enjoy the refund, but still gives you the ability to meet your other financial goals.
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