How to Spend your Tax Refund? Don’t!

Tax Day is April 15. It comes every year and with it, our Facebook feeds, Twitter and Instagram accounts are full with everyone updating and showing off friends & family playing with the new “toys” they got with their tax refund!

Some people get a new car every year, or go on a family vacation, or go to an extravagant dinner they couldn’t have otherwise afforded.

For many families, tax season is the best time of year. Soon, they’re taking pictures of the latest Disney vacation, or the latest piece of technology they purchased. What does all this have in common? People are spending when they should probably be saving.

Let’s be real. Saving just isn’t as fun as spending but what if I told you that saving your tax return each year sets you up for opportunities to have more spending money throughout the year? Would you be interested in hearing more?

It’s true that a little delayed satisfaction can go a long way here. Let’s take for example, a family of four and a $1,500 tax refund. Believe it or not, that amount is modest by some standards.

This $1,500 could provide

  • a nice vacation for a family of four including hotel lodgings, fun and meals, OR
  • an action packed staycation at local attractions, museums & theme parks OR
  • an elegant night on the town (or two), OR
  • a down payment for a newer, nicer car on a trade-in.

But what if, instead, that same $1,500 was used to pre-pay your family’s electric bill (average $150/month) for 10 months? That would provide instant cash access of $150/month for 10 months!

Think of all the fun your family could have each month with that extra money. You could go to a museum, or go to the movies and dinner, or save a couple months and go to the local attractions. You could eliminate a bill that you pay each month, freeing up room in your regular budget and allowing you to create a new budget item of “FUN!”

Alternately, you could choose to pay off a debt, freeing your family of the burden of monthly payments and opening up that money for spending. You could also save or invest that money and see real dividends! That same $1,500 saved, or better yet, invested, could provide you with some real earning potential over the course of just a few years.

For a relatively conservative example, let’s say that your family invested the $1,500 in a return that yielded 4% compounded annually. The first year you would have $1,560.00. Doesn’t sound like much, does it?

Let’s say you decided to do the same again with your return (each year being $1,500) for an additional 3 years. In a matter of 4 years, your family would have $6,369.70. Doing this for 10 years in would leave you with a comfortable $18,009.16. Now THAT is something to get excited about! Think of all the ways you could spend all that money.

I think you might agree it was worth the time and energy spent saving. Sometimes the best way to spend your tax refund is not at all!

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