Many Americans like me count on their annual return and already have plans for how they will spend their tax refund. After brutal winter storms, rising inflation rates, and increasing prices the last few months, it couldn’t come at a better time. We have several large expenses on the horizon. Fortunately for my husband and me, we received a larger refund than we had anticipated this year. While I have always viewed this money as relief money to get ahead of our finances, others tell us they have other plans. Instead of paying bills, they want to use this “extra money” to splurge a little. Since we have a little more in the budget, this has led to some debate about how we should spend our tax refund this year.
How Do You Get a Tax Refund?
Every year, Americans must report their earned income by filing their federal and state tax returns. However, many people pay more than necessary. In fact, the IRS reports that nearly 75% of taxpayers overpay and receive a tax refund.
This usually happens because employers withhold more than the required amount. However, it also occurs when self-employed taxpayers overestimate their quarterly payments. Whatever the reason for overpayment, the government will reimburse the difference back to you. If the IRS owes you a refund, you can choose to have the funds issued by check or direct deposit to your bank account.
How Should You Spend Your Tax Refund?
For many full-time employees, this tax return adds up to thousands of dollars. In the past, I have always viewed this windfall as a means to gain ground toward my long-term financial goals. Sometimes I used my refund to pay bills, reduce debt, or invest in my future. While it was tempting to blow the money on large purchases, I erred on the side of caution. Instead of splurging, I used it to provide some financial breathing room.
However, we are now financially stable and have more discretionary funds with our return. Since we aren’t living on a student’s budget, would it be a terrible idea to spend some of it on things we enjoy? Or, should we be more conservative and reinvest it?
1. Invest it.
My knee-jerk reaction was to take the extra money and reinvest. Since I got into the investment game relatively late, I feel like I have several years to make up for. We already max out our annual contributions to our Roth IRA accounts. And, we also regularly add to our employer-sponsored 401ks and other brokerage accounts. We also have a healthy emergency fund and have topped off our Health Savings Account as well.
But we are always open to new opportunities. Although we have a well-rounded portfolio, my husband and I have recently discussed ways to further diversify our investments with alternatives asset classes. These conversations seem to have a way of returning to the real estate market. While in the past this was not an option, crowdsourcing platforms such as FundRise and Roofstock have made it more accessible to the average investor. And with rising demands for housing, this seems like a sound investment that offers profitable returns.
2. Put it towards home repairs and upgrades.
My husband’s response was to spend our tax refund on our home. There are several expensive maintenance issues and repairs that we have put off. For example, all the windows in the house need replacing. And, we also need a new HVAC unit. Moreover, our kitchen is long overdue for an update. But, all of these items come with a large price tag. The additional money would cover down payments and a considerable amount of the total cost. Not only would it improve the flow and functionality of our home, but it would also reduce our monthly utility bills. Any one of these projects would also increase the resale value of our home.
3. Spend it on our summer vacation.
Last but not least, we discussed using the money to pay for our summer vacation. We have both worked hard and look forward to getting away during the summer months. This year we will be driving across the country to hike state parks, visit friends, and go to a concert. Although we had budgeted to have a low-cost getaway, the extra funds would allow us to enjoy a few more indulgences along the way. Instead of relying on hotel points and basic meals, we could splurge and treat ourselves to a trip where we wouldn’t even have to think about the bottom line.
Being Practical vs. Indulging
As with all our decisions, we sat down and compared the merits of each choice. Coming from a modest background, my first instinct is to save and plan for our future. However, after years of construction, my husband sees the value of investing in our home. Meanwhile, the idea of doing something for us is also enticing.
In the end, we decided it was best to find a compromise between being practical and splurging a little. So, half of our tax refund will go toward a new HVAC unit. We will then invest a quarter of it in a high-performing REIT. Then, the remainder will fund our summer vacation and allow us an additional excursion during our trip.
It’s hard to live in a world of extremes, so it’s best to find the middle ground. Although we will spend the majority of it responsibly, we also want to enjoy our hard-earned money. So, once we meet all our financial obligations, we will use the rest to reward ourselves and indulge a little.
So, to answer my own question…no, it isn’t terrible to treat yourself and use your refund for things you enjoy. But as with all things in life, everything should be done in moderation.
How do you plan to spend your tax refund? Share your plans in the comments below!
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.