It is Tax Refund season!
I know that every year, I am giving the government a tax-free loan, but I still receive a large tax refund every year. I am not sure why I have not changed it to where I break even at the end of the year, but I think it might be related to the poorhouse days.
Anyway, many of the persons that I am counseling this time of year are receiving a large tax refund, and they are looking for advice on the best use of that money. Most of the time, they are wanting to pay down debt with the entire refund. My response might surprise you.
Joe Sangl's Guidelines – Spending Tax Refunds
- Create a Mini-Budget. You can download it HERE or click on "Tools" on the top of the page. Spend ALL of the refund on paper FIRST before the money ever gets into your grubby little paws! (Joe's grubby paws tend to spend all money that has not been budgeted – trust me on this!)
- If you do not have at least $1,000 in an emergency buffer fund, you need to make this TOP PRIORITY. AHEAD of paying down debt!!! Why? Because if the entire refund is spent to reduce debt, but there is NO emergency fund, it is VERY LIKELY that more debt will be incurred when life happens – the car breaks down, the refrigerator dies, the kids get sick, etc.
- If you have at least $1,000 in an emergency fund, and you still have debt besides the house, pay down debt and fund KNOWN, UPCOMING expenses. For example, the Sangl's use the tax refund to fund their summer vacations and some larger home improvement projects. These are KNOWN, UPCOMING expenses that could have been Budget Busting expenses.
If you have retained nothing of what is written here today, PLEASE get this – I spent three straight years of tax refunds paying off credit cards ONLY to look up and see that I was back in debt up to my eyeballs again. Spend your money on paper every single month, and you will not EVER regret it.