What to do with your Tax Refund

When we find out we are going to receive what might be thousands of dollars in tax refunds from the Federal or State Governments, we have two competing impulses:  wants versus needs. Those that are struggling may want to give this issue serious consideration, because any windfall like tax refunds or bonuses can really help us get out of financial crisis, or at the least set us on the path to doing so. Those doing okay, can really use these funds to plan smarter. Research indicates that most people who get windfalls and raises seldom see any change to their day-to-day cash flow management, since life just seems to happen and soak up any extra money that flows our way. These demanding recessionary and inflationary (i.e., health care, gasoline and food) times require diligence.

Needs: Basic items that are necessary to sustain basic living. In Dave Ramsey’s Financial Peace University class he advises that people should cover these things first, because sometimes people will pay for wants or debt and then not have money for important things like food and rent. Good for some to be reminded when they have money forthcoming.

  • Housing: rent or mortgage, utilities (basic phone only), real estate taxes and insurance
  • Groceries: food and personal care items
  • Transportation: car payment, gasoline and car insurance
  • Health: prescriptions and doctor provided care
  • Clothing
  • Childcare if working fulltime

Tier 2 Needs: Items that are not always necessary for day-to-day living, but help people with things such as health and not fall into pay-check to pay-check lifestyle. Again good for some to be reminded when they have money forthcoming.

  • Emergency savings for things like car repairs and health insurance deductibles
  • Health insurance and fitness
  • Pet expenses for those that already own one
  • Internet

Tier 3 Needs: Things people must do to get debt free, since when debt is eliminated extra money will be there for building up larger savings and investments. With no debt and savings, people will usually be a very good financial situation. If someone gets a tax refund or a bonus, these are the items to use it for:

  • Debt repayment, using the snowball method until all non-mortgage debt is repaid
  • Emergency savings fund for health insurance deductibles, car repairs and the like

Wants:  These are the things that people may be considering with their tax refund, but should refrain considering until they are out of debt and have funded 3 – 6 months of income in savings. Extra courage is needed, especially when we have done without for a long time:

  • New TV, car, furniture and appliances
  • Robust cable TV
  • Vacation
  • Smart phone or fully equipped phone with data and all the bells and whistles
  • Down payment on a new loan for anything