The refund on your 2018 tax return may be different than you expect unless you heeded the advice of the Internal Revenue Service. After the changes introduced by the 2017 Tax Cuts and Jobs Act, many people needed alterations to payroll tax withholding to see the refunds they expected. You could have more, less or about the same amount this year.
Assuming that you did receive a refund this year, what you do with it may have an impact on your personal finances all year long. While many taxpayers treat a refund as “mad money,” some may be blowing the very benefits they fought hard to earn. Here are some strategies to consider when deciding what to do with your 2019 refund.
Kill Credit Card Debt
If you have a balance lingering on a credit card, you have a slow leak on your finances that continues to get worse. Interest on credit card balances is not only high to start with, you may continue to pay interest on purchases long after you pay off the purchase itself if your balance never reaches zero.
Your tax refund is perhaps best applied to credit card debt as a benefit that tops virtually any other use. The time to pay the piper always arrives, so better than it be sooner rather than later. Reset your financial picture and do all you can to live within your means. It’s the best gift you can purchase for yourself.
Top Up Your Emergency Fund
If you don’t have savings equal to three to six months’ worth of living expenses, you’re also riding below the line of financial security. Job loss and illness are realities, as are home and car expenses. There are plenty of disasters that can’t be financed with the leftovers from your next paycheck, so a healthy emergency fund is more than simply extra cash, it’s peace of mind in investment form. Choose a savings vehicle that offers reasonable rates of return, but that still has liquidity. Disasters won’t wait for term deposits to mature.
Finance Your Future
If credit cards are paid down and your emergency fund is in place, you have the past and the present accounted for, so it’s obviously time to address the future. For many taxpayers, refunds originate from deductible contributions to savings such as 401(K) accounts, health savings accounts and others. Spending your entire refund on a vacation, new television or other extravagance minimizes the benefits of the reasons you acquired the refund in the first place.
Limit your luxury spending to a modest portion of your refund and re-invest the rest. Top off retirement vehicles such as a 401(k) or IRA, both of which have $500 of extra room beginning in 2019. An HSA, education or home ownership savings plan are other smart-money targets for your refund.
Minimize 2020’s Refund and Capture the Savings
Your tax refund is your own money returning to you. You’ve loaned it to the government through your payroll withholding tax. Very generously, you’ve provided this loan to the government without interest. For those with poor money-saving habits, this might be the only way to ensure there’s an influx of cash once a year, but it’s not your best option in terms of savings.
File a new W-4 withholding tax form with your employer to reduce the size of your refund and capture the extra dollars in your paycheck so that you have control of these funds throughout the year. Combined with the priorities outlined above, you’re well on the way to establishing real control over your financial life. It’s your money and it’s up to you to make it happen.