Ah, tax season. If you work in finance, you have a love-hate relationship with it. If you work in another field, you probably dread it. Because math. And paperwork.
I have an annual ritual of spreading out all my handbags on my bed. One by one, I open every pocket, pouch, zipper, snap, and button to empty out the stacks of receipts left behind in order to file my taxes.
Clearly, I could use a lesson or two in file organization. We’ve all got our areas to improve on, right?
While document organization is for another post, today I’m sharing ideas to answer the #1 question I receive this time of year:
“What do I do with my tax refund?“
-Taxpayers everywhere
The answer that naturally comes to mind for you depends on your underlying “Money Types.” Curious to know what yours are? Take the free quiz.
Because taxes can be a bit dry for reading material, and we are in fashion show season, I’ve decided to share these ideas in a Style Guide format. Because if you’re like me, you’d much rather browse through Vogue than the U.S. Tax Code.
Look 1: Pay Down Debt
While it’s not the answer you wanted to hear, it’s the one you needed to hear. Yes, I know Louis Vuitton is right up the road from you and your refund is the exact price as the bag you’ve been eyeing.
But you know what else is way up there with that price tag? That credit card balance you’re being charged 24% interest on. Ewwww.
I’m writing this out for myself, too. I, too, still struggle at times to see past the glamorous window displays and gold heat-stamped monogrammed leather works of art. I’ve blown money I didn’t have on things I didn’t need. (More on that for another day – it was one of my motivators for starting this business in the first place!)
Anyway, if we are carrying around high-interest debt, we are not just reducing our monthly cash flow with those required minimum payments. We are reducing our ability to maximize our future investment returns.
Style tip: If you are paying 24% interest on debt while investing in the stock market with an average annual return of 7%-8%, you are actually losing money.
This is something that so many women struggle with – you are not alone! If you’d like some help coming up with a money game plan, shoot me a note to book your free discovery session.
High interest debt is so last tax season. If you don’t want to get caught on the worst-dressed list, follow my S-H-O-P method with every paycheck.
Look 2: Contribute to Your Emergency Savings
If debt is not something you need to address, 1) good for you! 2) keep reading!
The whole point of an emergency fund is to prevent unexpected expenses from becoming emergencies.
Everyone has their “number” – the amount of liquid, readily accessible cash you want to have on hand at any given time “just in case.” This number is different for everyone, and I’m not here to lecture you on what it should be. After all, cash over the long-term is a poor investment.
Instead, I’ll just share my observation of my clients:
Style tip: When one has anywhere between 3-6 months worth of expenses in liquid cash, financial “emergencies” aren’t really a thing anymore.
Will your tax refund help you achieve your ideal savings “number”? If so, you know what to do. 🙂
Look 3: Invest in Future-You
You know what I love more than a brand new pair of Louboutins? Compound interest.
In fact, I share more on it’s beauty and power in my article, Why Compound Interest is Better Than a Birkin Bag.
And the best way to experience it? Investing.
Whether you do so via a retirement savings account (find the right one for you here) or via a taxable brokerage account, investing will allow you to reap the benefits of patience, discipline, and compound interest. Future-you will be oh-so-grateful.
You don’t have to have a lot to get started, either! There are tons of low-cost ways to invest, no matter how small your beginning principal. Think of your tax refund as the perfect initial investment!
Look 4: Shop for Christmas and birthday gifts
Do you already have Looks 1, 2, and 3 in your wardrobe (wallet)? Consider using your tax refund to get ahead of the holiday shopping rush and begin gathering this year’s Christmas gifts now.
This trick will prevent you from blowing your budget on Black Friday, running up credit card balances after a year’s worth of hard work not touching them, or having to pay for expedited shipping come the week before Christmas.
Instead, you’ll be able to focus on enjoying the holiday season, sipping on hot toddy’s, and spending time with the ones you love.
Style tip: While Black Friday is typically the best time of year to snag electronics at a steal (I see you, people of Wal-Mart, trampling each other over a TV), most other items on your wish list will be on sale many times before November. Some retailers even have semi-annual sales nowhere near the holidays that end up being the best prices!
Want to learn more on how to stay fiscally fabulous during the holidays? Access my top tips here.
Look 5: Add your refund to your fun fund
Feeling good about Looks 1-5 and want to treat yourself with your tax refund? Go for it!
If you haven’t figured out already, I have a strict policy against money-shaming and money-guilt around here. Cookie-cutter financial and budgeting advice diminishes the beauty of individualism and the uniqueness of each person’s priorities.
Therefore, as a money coach, I’ll never be one to criticize your money choices or recommend you completely deprive yourself of the things in life that give you joy (your morning latte included).
Instead, we will work together to understand your emotions and thought patterns tied to money and how your spending and saving choices have evolved since you were a child!
From there, we can determine small, significant changes to make as you transform your relationship with money – morning latte in hand.
Look 6: Give back
The joy of giving back to your community is unparalleled.
Everyone has causes close to their heart. If charitable giving is part of your ideal financial picture, why not use your tax refund to pay it forward?
Need some inspiration on which causes to focus on? Here’s a fairly comprehensive list of charities from CharityWatch.org. Their list of top-rated charities put 75% or more of their budgets towards programs, among other criteria. While I don’t suggest this be the only way you choose your charities to donate to, it’s a great starting point!
The Tax Refund Truth
In closing, it’s important to remember that how we do one thing is how we do everything.
If we take opportunities like our tax refunds to practice discipline, patience, and determination in pursuit of our financial goals, we are more likely to do so in other parts of our lives, too.
I hope this Tax Refund Style Guide has been an enjoyable, fashionable opportunity for you to explore your options on what to do with your lump sum from the IRS this year.
What other “looks” would you add to this list of ways to use your tax refund?
Xx, Faith
Have we met yet? Get to know me here.
Want to know how I help driven, ambitious women like you transform their relationship with money? Learn more about my coaching services!
