Lend money to the family? Of course if it’s Uncle Sam


You’ve gathered all your paperwork and gone through all of TurboTax prompts (not to mention three cups of coffee). With one final click, here’s what you’ve been waiting for – the part that makes blowing an entire Saturday worth it: your official tax refund amount.

Maybe that’s enough to pay off the last of your Christmas credit card bills. Maybe you’ll use it to repair the house or finance your family’s summer vacation, or to pay off a large chunk of student loan debt. Awesome, isn’t it?

Well, a lot of personal finance experts will tell you that is stupid – that you have basically given an interest free loan to the government in the last 12 months.

If you had invested that money instead, logically you would have earned interest or even investment gains.

And yes, it is… in theory. But for most of us, that’s not the case.

Fifty-nine percent of all credit card holders currently have a balance on at least one card. Of those who are in debt, 56% have been in debt for at least a year, according to a 2019 CreditCards.com survey. And since the global coronavirus pandemic, 63% said they were living paycheck to paycheck.

If there’s one thing most of us desperately need, it’s someone who forces us to save our money, even if it’s our cranky old Uncle Sam. “On MY day, we saved up on a car and bought it in cash! he howls. And he’s right.

We often lament about disappearance of pension plans, but they were essentially no more than forced savings vehicles, siphoning off a fairly large chunk of an employee’s salary in exchange for a set monthly payment upon retirement. Meanwhile, the shift to “letting us invest this money on our own instead” – the age of 401 (k) and IRA – has led to a nationwide pension crisis.

The lesson is clear: Most of us cannot be trusted to spend our money responsibly, or are simply unable to keep up with stagnant salaries and rapidly growing expenses such as college, health care, and the big monthly bills that didn’t even exist 25 years ago, like smartphone and internet plans.

So don’t let anyone tell you that getting a big refund check from your old Uncle Sam is a bad financial blow. Forcing yourself to save is almost always a good idea.

And with interest rates so low, even if you had Had been diligent enough to put that money into a high yield savings account, you would have earned $ 15 in interest on an average repayment of $ 2,800.

However, you are not completely off the hook. What matters most is what you do with that money now.

What to do with your tax refund

It can be extremely tempting to splurge on yourself when you end up with a check for a thousand dollars or more – and, okay, a good dinner isn’t going to derail your retirement plans. But make sure you do something productive with most of that big check, instead of wasting it on fleeting purchases that you won’t remember in a month.

Here are some great ways to use your tax refund:

Pay off the debt

If you’re swimming in high interest credit card debt or student loans, paying off a large chunk of it all at once will seem like a major victory that can keep you attacking yourself. Plus, it’ll give you immediate leeway by lowering your minimum payments and the amount of interest you owe each month.

Start an emergency fund

It cannot be stressed enough: you need an emergency fund. Unforeseen emergencies can create serious financial and emotional stress, but a good-sized emergency fund, enough to cover three to six months of expenses, can alleviate some of that stress.

Start your emergency fund with a $ 1,000 tax refund. Then automatically add a few more dollars to it every week and don’t stop.

Open or fund a Roth IRA

One of the best ways to save for retirement is to a Roth IRA if your income falls below acceptable limits (which from $ 129,000 for single tax filers and from $ 204,000 for married couples for 2022).

This is because with a Roth, unlike a 401 (k) or a traditional IRA, you can withdraw your contributions as well as any investment gains. completely tax exempt upon retirement. You pay taxes upfront with a Roth, investing after-tax dollars, like your tax refund or one of your net earnings

Planning a vacation

A June poll by American Express Travel found that affluent travelers expect to spend an average of $ 4,790 on luxury travel by 2022. Depending on how much your reimbursement – and your family – see if you can plan your entire summer vacation for less than what you received from the IRS. (Don’t worry, you don’t need to take Uncle Sam with you.)

While we never feel bad about our vacation expenses here, there are plenty of ways to lower the cost of a trip so your tax refund will cover it. Try camping some of the time, visiting national parks or other frugal destinations, or collecting credit card reward points.

Buy something that will save you money

While we don’t advocate throwing your refund check on a new flat screen TV or going to the mall, many purchases can save you more money than they cost in the long run. A slow cooker can pay for itself quickly if it means you’re cooking at home more often. A bike to get to work can save you money on gas, parking, and expensive wear and tear on your vehicle.

Start investing

Whether in an IRA or a traditional brokerage account, most mutual funds (even low cost index funds) require an initial deposit of $ 1,000 or $ 3,000, but then allow you to contribute more. small amounts in the future, like $ 100 per month. When it comes to investing, it’s always best to start early, and the average tax refund can get you up and running.

Tackling a Home Renovation Project

Spring and summer are the perfect seasons to take on some neglected home repairs or a big remodeling project, and making smart home improvements is usually a pretty smart investment if you don’t burn yourself out doing it.

Start a down payment for your next car or house

When it comes to buying a car or a home, the more down payment you can make, the less you’ll need to borrow, which means lower monthly payments and often better loan terms. If you are planning to make a large purchase in the next couple of years, start with a specially designated down payment fund.

[This article was originally published on The Simple Dollar in February, 2020. It was updated in November, 2021.]


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