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at Debt Reduction Services

What to do with my tax refund?Tax-refund-pyramid

It’s that time of the year again, when CPAs go into overdrive, when citizens fret over their deductions and credits, and when those receiving a tax refund get to ask the age-old question: What do I do with all this money?!

Yes, it’s Tax Time!

While I’m not a huge fan of massive tax refunds (which typically mean the government is taking out more from each of our paychecks then we should let them. It’s generally a better idea to get more out of each paycheck than it is to give the government an interest-free loan on the money that they’re keeping from our paychecks), there are some great things that households can do with whatever funds the government sends them back in the next few months.

Here’s the essence of the Tax Refund Pyramid:

  • NEEDS: 30%
  • DEBT: 25%
  • SAVE: 20%
  • INVEST: 15%
  • ENJOY: 10%

As an example, a household receiving a $2,000 tax refund might consider doing the following with their money:

Expense% of RefundAmount to SpendUses
  • Fix an appliance
  • Repair a vehicle
  • Purchase necessary clothing (e.g. for work)
  • Pay toward back child support
  • Pay off payday, title, or other high-fee loans
  • Pay medical bills
  • Pay credit card, store cards, and gas card debts
  • Pay down car loan
  • Pay down mortgage loan*
SAVE20%$400Place into Savings Account(s) for Future

  • Appliances or Furniture Replacement
  • Repair or Replace Vehicle
  • Medical Emergency
  • Vacation
  • Gift Giving (Birthdays, Christmas, etc.)
INVEST15%$300In Retirement Account (401k, IRA, etc.)

  • Retirement and Long-term Goals
  • Fun
  • Recreation
  • Entertainment
  • Dining Out

Just figure out your own tax refund pyramid and enjoy!

I would suggest, though, that even before the refund check arrives (by mail or direct deposit) you decide where to spend it. From the time you submit your tax return until you receive the money in hand (or in the bank), you should typically have at least between 10 and 15 days, and several more if you’re requesting a mailed check. That’s plenty of time to make your decisions. The sooner the better. Otherwise, with check in hand (or in the bank), emotions take over, and we’re significantly more likely to spend that money on one large (and often unnecessary) purchase.

And that’s how you build your very own tax refund pyramid. Easy enough, right? And by taking care of your needs, paying down your debts, saving and investing for your future and enjoying yourself, you’ll be feeling like a financial Pharaoh in no time!

todd-christensen-portraitTodd Christensen

Director of Education at Debt Reduction Services Inc.,

a nonprofit Credit Counseling Organization

*Many financial advisers suggest never paying off your mortgage since interest rates are typically much lower than the return you’re likely to earn on securities investments. Unfortunately, as too many learned during the housing downturn of the Great Recession, owing more on your home than what it’s worth takes away many importance choices the homeowner might want to make. For example, if you owe more than what your home is worth, moving away to take another job is often out of the question.

Do You Have Questions About the Best Use of Your Tax Refund?

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So if you need more tax refund tips or have any other questions about your personal finances, please feel free to comment below and we’ll get back on and answer as fast as we can!

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