It is important that you get the smallest tax refund possible; so that you have the money you need during the year. However, if you are getting a large refund back, you should carefully consider how you are going to spend the money, so you can put it to the very best use possible. It is surprising at how easily and how quickly an extra $4,000 or $5,000 can disappear if you do not have a set purpose for the money. Creating a plan will also help you match your spending to your priorities.
First, you should consider your priorities and where you are with your financial plan. If you do not have your small emergency fund of at least $1,000, you should set that amount aside right now. Put the money in a savings account and do not use unless it is a real emergency like a car repair or a medical bill. Don’t let yourself dip into it so you can eat out that week because you had a tough day at the office or because your found the perfect pair of shoes on sale, and your running a bit tight on cash this month. Having that money in the bank can give you a real peace of mind, and it allows you to make the remainder of your financial decisions with a clear head.
Next, you need to consider where you are financially right now. If you are still working to pay off your debt, you need to apply the majority of what you get back towards your debt. This will help you to move forward on your debt payment plan and it can help to relieve some of the financial pressure you are feeling. It is nice to see debts cleaned up quickly, which can continue to motivate you while you work towards paying off your debt.
If you have already paid off all of your debt, you can apply it towards your other financial goals such as your six month emergency fund, or to save up for other items like home repairs and remodeling or your dream vacation fund. This is a good way to reach your financial goals more quickly. Any extra money you receive should be used in a similar manner.
You should also set aside a small portion of the money, about ten percent, to use on something you want. This small amount can help you stay focused on your other goals, because you have the chance to have a little relief from the focus on reaching your goals. It is the same as receiving a reward for reaching one of your financial milestones as you try to get out of debt and get control of your finances. Discuss what you want to do with the money with your spouse, and be very firm in sticking to the amount you have set aside.
Once you have determined how you are going to spend your large refund, you will need to adjust your withholdings so that you do not get a large refund in the future. Instead of allowing the government to take money that you earn throughout the year, you should get the money back in each paycheck so you can reach your financial goals more quickly. The trick is to get your withholdings to be just the right amount so you get about $100.00 back each year. You do not want to end up owing money to the IRS at the end of the year. The withholdings calculator offered by the IRS can help you do that. This will help you get the money when you need it throughout the year.