Five Ways to Be Smarter with Your Tax Refund

Image via Hubspot.
Image via Hubspot.

I look forward to February. No, it’s not because of the Super Bowl and Valentine’s Day. It’s because it’s traditionally the month that I file my taxes. I actually enjoy the process of plugging everything into Turbo Tax and watching the counter go up and down until it lands on my refund amount. But, the kicker is, I don’t want too MUCH of a refund each year. I don’t want a big amount and dream of what I’m going to do with this “free” money – vacation, clothes, pay off debt. You might be thinking that I’m crazy, but hear me out. For years I’ve been using this handy tool on called the IRS Withholding Calculator.

The idea for not wanting a large refund stems from this argument: Who do you want to have and use your money over the course of a year – you or the government? By having zero exemptions (or a lower than needed amount) a taxpayer is essentially giving the government a 0% interest loan of their money until s/he files taxes the next year. So let’s say for example, after using the IRS Withholding Calculator, you find that by claiming five (5) exemptions on your federal withholdings, your bi-monthly pay is increased by $125. That’s $250 a month that in the past you just gave to the government and now it’s in your pocket! Would you rather have $250 extra each month or a $3,000 yearly tax refund?

What You Could Do with an Extra $250 a month:

Increase your Savings (401k, Traditional IRA, Roth IRA, etc.)

Everyone knows that it’s ideal to save at least 10% of your income for retirement. For every nine years that you work with a 10% profit margin/savings rate, you can take one year off. BUT with a 20% profit margin/savings rate you can shave one year off of every FOUR years worked. Put that extra $250 towards your retirement and get there faster! Do you have more to save? If you can do a 50% profit margin/savings rate, it’s a one-year-working to one-year-off ratio.

Put more towards the Balanced Money Formula

LearnVest (a fantastic website) touts that everyone should have three basic categories for after-tax income, which are:

  1. 50% for Needs (basic housing, utilities, clothing, food, insurance, etc.)
  2. 20% or more for Savings (debt reduction, emergency savings, retirement, kids’ college funds, etc.)
  3. 30% for Wants (everything else, a.k.a. the fun stuff)

DigitUse Digit

This innovative text-based company links your checking account to a Digit savings account. Every day, Digit checks your spending habits and removes a few dollars from your checking account if you can afford it. You can easily pause savings, increase/decrease intensity, or withdraw your money, and there are never fees. You also earn (small) monthly deposits on your balances. I’ve been doing it painlessly since March 2015 and my small withdrawals have added up to over $1,141! Give it a try – it’s free!

Amp up your contributions to charities and non-profits to an automated monthly contribution

My employer does a 100% match for contributions over $25 and up to $2,000 per employee per year. When was the last time you checked out your contribution benefits at work?

Plan for vacation

Plan for that vacation or other long-term want over the whole year, and not just after you know what your tax refund will be.

Good luck with filing this year!

Jennifer Helton Holt

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