This year I’m not taking the advice from my friend Liz Weston, who says you should treat yourself with 10 percent of any windfall and then put the rest where it will do some good. My 2016 income tax refund will be deposited directly into savings and there it will stay.
Some people believe that tax refund = an interest-free loan to Uncle Sam. Personally, I think a refund makes sense for those who don’t have the discipline to save. Let me define that further: It makes sense if they use the refunds in smart ways.
Here’s an example of a not-smart way: Friends of my daughter’s planned to buy a race-car bed for their toddler son. This despite the fact that she didn’t work and his profession (drywaller) left him unemployed off and on.
A race-car bed. Sure, it would be fun to give that to your kid. You know what else is fun? Not having to worry about how you’ll feed him during during periods of little to no work.
Here are some ways that make more sense.
Money-smart choices
Start an emergency fund. Again, even a minor refund can be seed money. Once you get going, keep looking for ways to add to it. Having as little as $500 stashed can mean the difference between paying cash for those broken glasses or worn-out tires and having to put the purchases on credit.
(Personally, I’d put them on a rewards credit card and then pay the bill in full when it arrives. Those rewards can come in handy, especially if your card lets you turn it into cash against your next bill.)
Pay off consumer debt. You’ll sleep better without the specter of the Ghost of Obligations Past sneaking into your head at night.
Stock up. Build the pantry up with canned goods, dry beans, pasta and sauce, flour, powdered milk and other nonperishables. The more ingredients you have on hand, the less likely you are to stop for takeout. (Tip: Check out Erin Chase’s FreezEasy meal plans and shop accordingly.)
Think about retirement. It’s pretty simple to start a Roth IRA or some other kind of retirement plan. The NerdWallet personal finance site can show you how.
Get your eyes examined. When was your last specs check? Look for special deals in the ValPak envelope, the Sunday coupon inserts or online. (Tip: You don’t have to be a Costco member to use its optical shop.)
Go see the dentist. No dental insurance? Look for new-patient specials, which generally include X-rays. Sometimes these show up via social commerce deals.
Thinking ahead
Join a warehouse club. While a super-couponer can often get better deals, not everyone is that dedicated. If you’re not a disciplined clipper, it’s preferable to get a decent price consistently than to be at the mercy of the stores; as a bonus, buying a pallet or two of TP or breakfast cereal means having to shop less often.
(Tip: Check out the Coupon Mom website to find out how simple matching coupons and sales can be. She does all the work for you.)
Prepay auto insurance. It might be cheaper to pay for a year at a time. Even if it’s not much of a discount, you’ll be paid up for 12 months and won’t have to worry about it.
Get a transit pass. If you’re a bus or train rider, see if you can buy a monthly pass. This is almost certain to save you money. Bonus: No more hassles about exact change.
Buy some discounted gift cards. You’ll save from 2 to 20 percent off ordinary purchases like haircuts, pet products, groceries, home improvement supplies, gasoline and movies. Right now I’ve got a $50 Regis Salons card (bought at 12 percent off), a Walgreens card (11 percent off) and a few hundred dollars’ worth of Cinemark gift cards* (20 percent off). Go to GiftCardGranny.com and look for the best prices.
Improve your home. Faucet aerators, compact fluorescent bulbs, weatherstripping, a low-flow showerhead, draft-stopping sweeps for the bottoms of doors – all will reduce energy costs.
If your refund is huge, think about putting it toward an energy-efficient appliance or a new boiler/furnace. (Tip: Some fixes are eligible for federal tax credits for next year’s return.)
Get a tuneup. Keeping up with scheduled maintenance helps your vehicle get better mileage and increases the odds of finding small problems vs. fixing huge ones. If tires are balding, start looking for sales; however, you might find the best deal at that warehouse club.
Are you the type who changes your own oil? Watch for the best deal on your auto’s beverage of choice, and pick up other items (windshield fluid, antifreeze, wiper blades) while you’re there.
*Yes, that’s a lot of sunk cost. But DF loves the Metropolitan Opera HD broadcasts and tickets are $24 per person. Sometimes I get articles out of the experience, too, such as “5 financial lessons from ‘Parsifal’” and “8 personal finance lessons from ‘Gotterdammerung’.”
Readers: Are you getting a refund? If so, will it be saved or spent?
Usually, we save our refund. However, this year it is going to the new roof fund. We’ve been saving all year but, the money we get back will put us over the top.
So that makes it a roofund, I guess? (Sorry.)
It’s great to be able to pay cash vs. having to finance it. I call that a win.
Well, I laughed but … 🙂
I will use the fed refund to pay the state taxes and the local taxes for me. My husbands employer makes the necessary deductions to cover his returns; mine does not.
How does your employer NOT make the necessary deductions? You have to fill out a W-4 and YOU decide what the deductions will be based on your filing status and exemptions claimed. Unless you aren’t considered an employee and are issued a 1099, which does result in no taxes being withheld.
If that toddler needs a bed, the parents should invest in a decent new mattress, and a plain bed frame, or a used wooden one from Habitat or hospice resale. That race car bed is going to be outgrown in what seems like no time, when a regular one will last until he is grown or beyond. The bed in my house being an example, 22 years old and still good for guests! Tax refund went into savings account.
That’s sort of what my daughter suggested, but she doubts it did any good. They were all about the instant gratification.
Great ideas, enjoyed the post.
I actually did buy my first brand new mattress with a little more than half of my refund this year. In my 47 years I have only had “hand me down” mattresses. This last one was so hard, and with a severely arthritic hip, I couldn’t stand it anymore.
I split the rest between my emergency fund and paying down my one credit card bill I am hacking away at.
Wondering if I should lower my withholdings, my refund was 1500.
I had halved my refund purposely from last year when it was over $1000. It will be going to pay for some much needed pair of eyeglasses.
Husband is retired, and we do not get a refund, but also do not have to pay in any taxes as we only get social security and a small pension. I did have to send a check for $3 for Obamacare insurance. It is really hard to figure out exactly how much, as it always boils down to the little amount of interest that we have in the bank. Thankfully, I will be getting my ss in Sept and will be on Medicare instead.
I used my refund for much needed car repair and new tires. I felt very blessed to receive exactly what I needed for the repair.
Our refund went straight back to the US government in order to pay next year’s estimated taxes. Fun times.
I used to do that before I was an LLC. Very happy to be getting the cash in hand, even though it’s going into savings.
We are using our refund to pay down our solar system!! We got a bigger refund than normal because of the tax incentive to go solar. Love that California sun!!
Eight years ago, my refund went to a new mattress.
The last 5 years, my refund has been larger, due to being a homeowner, I mean, mortgage-holder – I’ve taken my refund and put it directly to principal on the mortgage.
Last year, I took 20% of the refund and used it to pay for part of a much-needed vacation though.
This year, I don’t get a refund – I will owe state taxes – but it’s a one time thing, and next year I’ll be back on the refund train!
I know that it would be better to adjust my withholdings to not get a refund – but I do like to be able to put that beefy extra payment to principal on my mortgage!
Guilty, guilty, guilty. I KNOW that I would waste my “refund” if I were to get it each week in my paycheck. I am weak that way, I know it and accept it. That is why when I get my tax refund it immediately goes towards paying for something. Be it the property taxes, home repair, etc. I don’t even keep 10% for myself. While I get the point that it is an interest free loan to Uncle Sam, I know, for myself, that it is an automatic (painless) savings plan for me. And if I don’t care, why should anyone else?
A relative of mine feels the same way. Although she and her husband live a fairly austere lifestyle, she says that a guaranteed tax refund is better than a maybe-savings-all-year. It works for them, and apparently it works for you.
We’ll be able to pay for DD’s last semester of college. She has only 9 credits (3 classes) to go. No debt for her, no debt for us! Go us!! (Sorry — got a little carried away there.) The remainder (she’s at a state school) goes into retirement savings.
Great post. I am glad to see that others feel as I do about getting a tax refund.
That’s a wonderful gift to her, and the retirement savings are a gift to your whole family — after all, if you didn’t have enough money to live on later you might have to move in with one of your kids. Brrrrr…..
Congratulations to your daughter on her degree. Kudos for doing it without debt.
I’ll confess to entering a giveaway for a race car bed for LB but that’s about as far as that goes.
A tax refund is only a dream for us. This year we’re anticipating a huge tax hit thanks to finalizing some paperwork on PiC’s side that resulted in “huge gains” on paper but absolutely none in real life. I can’t elaborate further but if this is the literal price I pay to unhook that line from our finances, so be it.
I shall wistfully think of next year when we might break even again, and cringe ever so slightly when the tax bill comes home to roost. It’s going to hurt.
We almost always get a tax refund because we almost always deliberately overpay. And the reason we do *that* is because DH is self-employed and it can really hurt to come up with money for a tax bill in April and then estimated taxes again in June.
This year, we overpaid outrageously because his income was unpredictably down, due to work time lost dealing with his mother (brain surgery, attendant issues) who lives 400 miles away (i.e. we can’t just go over after work to help her out).
With the resulting refund – I haven’t calculated it yet, but I suspect it’s going to be pretty big – we will roll over a bit to reduce the rest of the 2016 estimated taxes, and take most of it to pay off some credit card balances he’s been carrying for too long. After which, if I have anything to say about it, those credit card accounts will be CLOSED.
LOL my first reaction to the title of the article was what if I don’t want to (be responsible and yes in a toddler voice!) then I read it and I already did things on the list!
I set ahead $1000 for a starter emergency fund, I did a tune up on my car (including oil change, wipers, new tires) , I prepaid my auto insurance and a couple other bills as well. I joined Costco with it which should help to stock on that emergency fund that you can get 😉 got that advice from a smart lady! I did have some fun with it for me and the kids. So for that race car bed I think for the parents a splurge might be OK has along as they make good choices with the rest of the money. (but really even putting ahead some funds for xmas would prolly be less stressful for them down the line so do it )
Congratulations! Having an emergency fund makes life so much easier.
Next year, another smart thing to do (as long as youre not paying some tax preparer by the form) is to use form 8888 to split your federal refund between a savings and checking account (or a checking account and a federal savings bond) and then enter the drawing from these good people – saveyourrefund.org. They give away $100 to a bunch of people who do that, every year. If you’re really motivated you can send the a photo and say something about savings, to get a chance at a bigger prize.
The VITA site where I volunteer promotes this pretty heavily and gets a TON of winners every year. And you get a chance in the drawing for every week of tax season after you enter, so it is a nice incentive to file as early as you can.