Congrats! You’ve got yourself a mini windfall!
You’ve landed yourself a nice tax refund, a sweet bonus, or some other cash deposit coming your way.
So what now?
While it can be tempting to spend that pile of cash, you can actually use it to make some impressive changes in your family’s finances! If you want to maximize the benefit of your new cash — without feeling like you’re on a strict money diet — here are some smart things to do with your tax refund:
1. Beef up your emergency fund.
An emergency fund’s value extends far, far beyond a dollar amount.
It represents peace of mind.
Experts typically recommend that you have anywhere from 3 – 12 months of money set aside in your emergency fund. But more is definitely better!
So, if disaster strikes, you can pull from that fund to cover your basic living expenses.
Give your emergency fund a checkup. Does it have enough cash to meet your emergency fund target?
Pad your account with your tax refund or bonus. You’ll get a big boost toward reaching your goal and priceless peace of mind.
2. Retire sooner.
Once you’ve set money aside for the here and now, look to the future.
If you’re behind on your retirement savings plan, your tax refund can be the perfect way to accelerate you toward where you need to be. And — if you’re already on track — you can absolutely get ahead of the game with an extra contribution to your nest egg.
My favorite place to stash cash for retirement is a Roth IRA. So long as you don’t exceed the annual contribution or income limits, I recommend putting some or all of your tax refund into your Roth IRA.
Now, if your windfall comes from a company bonus, saving more for retirement is even simpler! Most Americans have a fixed percentage of their paycheck that gets automatically funneled into a retirement plan — a 401(k), Roth 401(k), 403(b), or something similar.
If that’s you, then your employer will push that same percentage of your bonus check into your retirement (unless you direct the company otherwise).
So — just like that — you’re saving more toward retirement without even trying!
3. Contribute to a big savings goal.
Saving to buy a home? Finance your kids’ education? Get away for a summer vacation?
Earmark your windfall for that special dream, and you’ll reach your magic number that much sooner.
The strategy here is to use a sinking fund — a little-known but invaluable financial tool. Add to the one you’ve got or open a new sinking fund to start saving for your big goal.
Most online banks make opening multiple accounts a breeze, so they’re perfect for creating a place to stash cash specifically for your chosen goal. Designate accounts for holiday spending, summer camp, a kitchen remodel — whatever you want.
If you’re looking to save for college or medical costs, you have some sweet, tax-advantaged options for saving:
Open and invest in a 529 Plan or Coverdell ESA. The money you save now will grow over time. And you can withdraw those funds tax-free to cover qualified educational expenses.
Contribute to an HSA if you have a high-deductible health insurance policy. These amazing accounts offer an insane, three-time tax advantage.
Plus, they’re a secret weapon when it comes to investing and saving for medical costs during retirement.
4. Pay off debt.
Most Americans have at least one form of outstanding debt — like a mortgage, a car loan, a personal loan, credit card debt, or outstanding medical bills.
These days, the amount you’re paying in interest on that debt is likely way more than the amount of interest you could be earning — from keeping your cash in a savings account or CD.
Effectively, your debt is costing you money.
So pay down that debt and start earning interest instead of paying it!
Use an accelerated debt repayment strategy like the debt avalanche or debt snowball methods. They’ll tell you exactly which debt you should pay extra toward to maximize the power of your dollar — saving you pricey interest payments and time in debt!
So, decide how much extra money you can put toward your debt with your tax refund or workplace bonus. Apply the repayment strategy you’ve selected. And watch yourself hurtle forward toward that debt-free life.
5. Invest in the market.
Are you already killing it when it comes to the four objectives up above?
Then it’s time to level-up so you can really supercharge your family’s finances!
When it comes to saving, resist the urge to stockpile vast amounts of cash in savings. Yes, you need a healthy emergency fund and plenty of money to cover your needs.
But beyond that, you may want to consider investing the excess.
After all, even high-interest savings accounts yield significantly lower interest rates than the returns you can get over time from quality investments.
I love commission-free ETFs and index funds for their great performance and ultra-low fees — a surprisingly pricey cost that can eat away at your earnings.
When you invest your tax refund or bonus now, you can enjoy the rewards that come from the long-term yields of those investments.
6. Invest in yourself.
Okay, so far, this list has revolved around ways you can use your money to benefit your future self — saving for an unknown emergency, planning for retirement, prepping for college or medical costs, etc.
But what about improving your life right now?
I’m talking about paying money now that will yield real returns in your day-to-day life! Maybe those returns are financial, but they can also be benefits in your personal well-being, relationship satisfaction, or family’s happiness.
Investing in yourself and what’s important to you is absolutely a smart money choice. For instance, you could put money toward . . .
- Funding a business you’re building
- Attending a seminar to enhance your professional skills
- Visiting a therapist who can help you reach an important life goal
- Joining a class at the local community college that contributes toward your personal development
- Taking a date out on the town with your spouse — an investment in your marriage!
Take a good look at your current goals. And brainstorm how a little extra money can get you closer to achieving those dreams!
7. Indulge a little.
I remember a Weight Watchers commercial in which Oprah herself sings the praises of the program’s flexibility. For her, it meant that she could lose weight while still eating delicious bread.
Likewise, we all need some wiggle room in our budgets for a good time!
You worked hard for your money. So — if you’re a proud penny pincher every other day of the year — loosen up and enjoy a little financial indulgence!
If your finances are healthy, give yourself permission to take a guilt-free weekend getaway. Go out for lunch. Pick up a copy of your favorite artist’s latest album. Get your hair styled just because.
Set aside at least a bit of your new money to use for pure enjoyment!
8. DON’T spend it before you get it.
The promise of a coming tax refund or bonus is exhilarating! Aaaand it’s all too easy to jump the gun on spending that money.
You find out you’re getting a $2000 tax refund or a $3000 bonus for your hard work on the job. So you go out and spend it as soon as you hear the news . . . and before it’s in your pocket.
Problem #1: You might be heading into debt.
If you don’t actually have that cash yet, you might be spending on credit or pulling from an emergency fund — which could cost you if you have an actual emergency before your new money shows up.
Either way, that can mean you wind up paying high interest costs — just for the joy of spending your money before it actually arrives.
So just decide to wait it out. When that cash lands in your hand, you’ll have the certainty of being able to save or spend without incurring any debt.
Problem #2: That dollar figure might be deceptive.
Suppose your CPA or tax preparation software says you’re getting a certain amount back from the government. That might be right . . . but it could be that the IRS finds a mistake in your return! And that can mean your refund is actually smaller than you realize.
Or let’s say we’re talking about a bonus check from work. A $3000 bonus does not mean a $3000 deposit in your account! The federal, state, and maybe local governments will happily take a healthy chunk of that. And some will go to your 401(k) if you automatic contributions in place.
The moral of the story?
Always wait to receive your cash before you commit it to a certain savings account or expense.
9. DON’T contribute to “lifestyle creep.”
Lifestyle creep is a sneaky, slippery slope. Here’s how it works:
You get a big tax refund, bonus, or raise. You’re pumped! So you upgrade your lifestyle — a bigger house, nicer car, better clothes, fancier restaurants, whatever.
Now that upgraded life becomes the new normal for your family.
Eventually, you burn through that new money. And you don’t revert to your previous (lower-budget) lifestyle.
Instead, you succumb to lifestyle creep. Now you’re living a lifestyle you can’t afford and going deeper and deeper into debt to maintain it.
It’s a vicious cycle.
To avoid this enticing trap, consciously live below your means whenever possible. If your income doubles, don’t automatically double your expenses.
And enjoy your hard-earned money while taking pride in the smart financial decisions you’re making for your family!
What are some of the smart ways (and the not-so-smart ways!) that you’ve spent a windfall?