Shoestring Living: Be smart with your tax refund

Molly Logan Anderson

Oh, how I love this time of year, but not only because of blooming flowers and singing birds. Nope, I’m referring to something even more exciting for most of us – the receipt of a tax refund. Is there anything better than that seemingly “free” money in the mailbox? 

This year, ours was a good size and we needed it, plain and simple. Given the current state of affairs for most of us, I bet I’m not alone. But as I’ve mentioned before, having a plan for our money is one the best steps toward financial freedom. Here are some thoughts about what to do with that short-lived windfall.

Spend a little

Yes, you read that right. We’re all going without these days and it feels good to treat yourself now and then. It’s my personal opinion that you should splurge a bit with that extra cash, just to make yourself feel a little bit special. Whether it’s a night out or something reasonably priced that you’ve been wanting, now’s the time. Spending a little will make saving a lot so much easier.

Pay down debt

If you’ve got debt, pay it down now. There is nothing more advantageous to your overall financial health than getting rid of revolving debt, especially the credit card variety. If you have a small amount saved for emergencies, somewhere around $500 to $1000, use the rest to lower credit card balances. If you’re one of the lucky ones with no credit card debt, consider putting the money toward unpaid auto or home equity loans.

Save for a rainy day

Once the credit cards are paid off, ensure that you have a larger slush fund for unforeseen events. A general rule of thumb from most financial experts is to plan for six months of living expenses. This will come in handy if you experience a job loss or and unplanned expense. According to nearly all experts, this is an imperative component of financial freedom.

Reduce next year’s refund

Take a look at the size of your refund. Is it huge? With the average amount recorded by the Internal Revenue Service to be $2488 in 2008, our family has been receiving far too much. Finally able to break the pattern of being “saved” by a big return, we’ve made the necessary adjustments to W4s to avoid getting such large sums in the future. Talk to your accountant about determining how much less you should pay throughout the year and how to make the change with your employer. One item to note, recalculate the amount again at the beginning of 2011, since it is determined by how many pay periods remain in the year. 

Molly Logan Anderson is a freelance writer who lives in the western suburbs of Chicago with her husband, Mike, three kids and black lab. Join Molly on her family’s journey of living a frugal life and making financial freedom their reality.