It’s tax season, the time of year where you’ll most likely be receiving a refund from the government for the taxes you overpaid throughout the year. I used to love getting a big tax refund every year. I’d spend the money without much of a plan until I became more proactive with my tax strategy. Now, my aim is to get the lowest tax refund possible. If I do receive a refund, I already know beforehand how I’ll spend it.
Here are the 3 questions you should ask yourself if you want to be more proactive and deliberate with how you spend your tax refund this year:
1. Does This Bring Me Closer To My Goals?
Re-assess your short and long-term goals. Do you want to; be debt free, build your emergency fund and/or invest more? If so, how can you spend your tax refund in a way that gets you closer to accomplishing your goals versus spending in a way that pulls you further away from your goals?
It’s tempting to see your tax return as free money and think to yourself:
“I should treat myself to a bag or a vacation” or “I deserve to splurge”
The thought process of wanting to splurge and treat yourself is precisely what’s holding you back from reaching financial freedom. Before you spend your tax refund money, ask yourself:
Will spending money on this bring me closer to reaching my goals?
2. Do I Really Need To Spend It Now?
If you can’t definitively answer the first question on this list and aren’t exactly sure how to spend the money in a way that aligns with your goals, just wait and don’t spend it. Just because you get the money now, doesn’t mean you have to spend it now.
Take a few days, weeks or even months to figure out what you really want to do with the money. Don’t rush into spending the money just because it’s there. Put it in your savings account until you have a clear direction of how you want to spend it.
Doing nothing is better than being busy doing nothing – Lao Tzu
3. How Can I Plan For Next Year?
If you received a tax refund or are anticipating a refund this year, it’s time to look at your withholding and adjust them to your benefit. The goal should be to get back as little money as possible. A tax return isn’t free money, it’s just money you overpaid to the government. The government is simply just giving you back your money with no interest.
Overpaying the government throughout the year is essentially just a zero-interest savings account for people without the personal willpower to save. You lose out on more potential returns and the flexibility you could get by saving that money yourself.
Speak to your tax preparer on how you can adjust your withholding. You can also check out the withholding calculator here which helps you figure out how much you should withhold in Federal Taxes. Alternatively, you could play around with free online tax preparation tools such as Turbo Tax and see how much you would get back by adjusting different variables.
Before you spend your tax refund remember to ask yourself these questions. Just like your overall finances, it is important to be proactive with your tax strategy. If you’ve received your tax refund already, did you spend it wisely? If you haven’t received it yet, will you ask yourselves these questions before you spend the money?