Ah… tax season. Whether you’re an accountant or not, I’m sure you’re glad it’s over.
Since my career choice is a little more *ahem* conventional among the world of fashion and lifestyle bloggers, I’ve received a lot of messages about business advice, money management tips, and, of course, taxes. While I’m not going to give you any sort of formal tax advice, as a 24-year-old accountant and soon-to-be-CPA, I have a little bit of an idea of what to do with the chunk of change you might be receiving as a refund. I hope that my expertise (as well as 24 years of my parents’ advice) can provide a little value to you.
Why am I getting a refund?
Well, first thing’s first – if you’re getting a tax refund, it means you gave the government an interest-free loan. Sure, it feels a lot better than paying the government once filing day rolls around, but every accountant out there knows the principle of the present value of money.
If you don’t, here it is:
Money is worth more to you now than it is later. If you don’t know what I mean, would you rather have $100 now or in a week?
The money you’re receiving might feel like a gift from the government, but it’s actually money you earned. The government took too much and is now saying “oops, I messed up, here’s that money back and no, I’m not paying you any interest.”
For some people who have trouble saving money, this might feel like a good way to save money so that you can’t spend it. There are a ton of things you can do to better manage your paychecks, like automatic deposits into an investment account. That way, your money can actually make you money. The power of compound interest will never cease to amaze me.
So, in other words, it’s not a gift, it’s a miscalculation. And – it happens to the best of us. Even I messed up my withholding this year with all the unexpected tax changes. You can consult with a tax professional to determine how to better withhold your taxes next year.
Ok, so what should I do with my refund?
So you’ve now got a good chunk of change burning a hole in your pocket. Maybe you really need that extra money right now or maybe you were doing just fine before it. If you need it, do with it what you will. If it just feels like extra cash on hand – keep reading.
Even though we may not have perfectly managed our taxes this year, there are plenty of ways to productively spend this money. They might seem obvious, but sometimes you just need to hear it from someone.
Pay off your debt.
If you can, the first thing you should think about doing with that money is paying off any debt you may have, especially if it has a high interest rate. The average tax refund is about $3,000 dollars, which could pay down a decent chunk of debt. This will save you from paying more interest in the future.
Invest in your retirement.
You know what I did with my very first tax return ever? I started a Roth IRA. Here was my rationale: I didn’t need that money before, so I don’t need it now. I might as well put it away (while I’m still in a low tax bracket). Future you will thank present you for this one.
Invest in anything.
If you feel like you need something a bit more liquid than a retirement account, try your hand at just regular investing. I use Acorn Investing and Wealthfront, personally, but there are plenty of other easy investment options if you’re just getting started.
Create a rainy day fund.
Honestly, just put that chunk of change in your savings account and swear to yourself that you’ll use it in an emergency. Apparently, it’s recommended that you should save 3-12 months of living expenses just in case.
Pay for your side-hustle.
Last but not least, invest in yourself. If you have a blog, pay for that site redesign or new logo you’ve been eyeing. Purchase that online course. Maybe you’ll even have a bit leftover for that whole investing thing.
All right, so what did you do with your refund?
Practice what you preach, am I right?
I actually don’t have any debt and I pay off my credit card bill in full every single month. I am extraordinarily privileged to be able to say that; I graduated from college debt free, I own my car, and I have a decent-paying job. So, if you must know, I used about a third of it to purchase a handbag I’ve been eyeing forever (I make frivolous purchases too!), invested a third of it, and put the remaining third in my savings account.
As a little reminder, I am not a tax professional nor am I a financial manager. Therefore, I must say the information provided in this post (and throughout my website) and accompanying material is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.
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