Using your tax refund to increase your financial happiness

Using your tax refund to increase your financial happiness

Now that the New Year holiday has passed many people start thinking about their tax returns, especially if they anticipate receiving a refund.  For many families, the tax refund is one of the largest infusions of money they will receive in a year.  There were many years when that was the situation in our household.  As we traveled our financial road there were times it was difficult to stay motivated.  Conflict developed over which financial goals to prioritize.  Even receiving money from a tax refund was stressful.  Here are some lessons we learned along the way.

Don’t spend money you don’t have yet!

Credit cards make it very easy to create a false sense of security.  A few times we purchased an item on a credit card and justified it by saying we would pay it off when we received our tax refund.  It might have made us feel better in the moment, but it actually cost us more money in the long run.  One year our refund was much lower than we anticipated, one year our refund was delayed (extra interest accumulated increasing our credit card debt), and one year there was no refund because we owed taxes!

The tax code has changed dramatically in the last few years and Covid relief measures (like the Child Tax Credit Advance) could reduce what you typically receive in a refund.  Because of this, it would be better to wait to make any purchases until after you have received your refund.

Make rough, not detailed plans for your refund

Exact numbers can lead to disappointment.  Just like planning a road-trip it is helpful to estimate your ETA, but traffic conditions, accidents, and construction can greatly impact your travel time.  For example, if I estimate a $1,000 tax refund but only receive $800 – my first emotion is disappointment – when in fact I now have $800 I didn’t have before.

Divide and conquer

Take a random poll of your family and friends – ask them how they will spend their tax refund.  Most people will answer one of three ways, pay down debt, save for future purchase, or buy something now.  I recommend doing all three, that is how my husband and I avoid disappointment and disagreements.  We decide in advance what percentage of our refund is going toward debt, what percentage to savings, and a percentage to something fun.  We settle on percentages, not exact amounts, so we don’t quibble if the refund is different than what we expected.  This method allows progress to be made on multiple financial priorities.

Past, present, and future

How does this work for us?  Long ago, we decided to subdivide any tax refund into thirds.  33% goes toward paying a debt (our financial past), 33% goes to a savings account (our financial future) and 33% goes to our financial present.  For our present (since we are a married couple) we split the last third in half – each of us can spend our allotment however we choose.  This helps us not to feel deprived as we would if we put all the refund toward the past or future.  My husband can buy some new electronic gadget or buy a cable sports package and I don’t judge!  Just like he can’t judge me if my share goes to sewing fabric or a day at the spa.  Dividing our tax refund into thirds allows us to make progress on long-term financial priorities and splurge a little.

Thinking in advance about how to spend your tax refund gives purpose to those dollars to make it part of your overall financial plan. You can also try to avoid a large refund altogether by taking out less in taxes and giving you more in your paycheck each month by adjusting your withholdings. Check out the article in the Mainstreet Library on doing an Annual Tax Withholding Allowance Checkup.

Meggan Orenstein
Meggan Orenstein

Meggan is an Accredited Financial Counselor (AFC®) and joined MainStreet Financial Planning as a ParaPlanner in 2021. She has worked in the financial industry for over 10 years in numerous roles in the areas of personal finances, tax preparation, credit and debt improvement, retirement planning (including the Thrift Savings Plan), family readiness/resiliency, and personal counseling. Success for her clients is achieved when she distills and effectively communicates complicated financial topics which leads to their greater understanding, personal confidence and goal achievement. Meggan has led numerous financial education and financial counseling efforts by partnering with Volunteer Income Tax Assistance (VITA) sites, Virginia Cooperative Extension, the military Transition Assistance Program at Fort Belvoir, and northern Virginia nonprofits. By employing the same goal planning and resiliency techniques she teaches others, Meggan and her husband enjoy a semi-nomadic, pre-retirement lifestyle.

Get Started with Us

Stay updated on future articles, shows, and podcasts