Best Utilize Your Tax Refund

We’ve officially entered the super exciting time of TAX SEASON! Well, if you’re getting a refund that is. What exactly should you do with this “extra” money this season? Save it? Pay off a debt or two? Invest it? Spend it? The possibilities might seem endless! However, I would encourage you to plan out your refund BEFORE you ever get it.

For questions like these, I typically refer back to the I Was Broke. Now I”m Not. Ladder. By identifying where you are on the ladder, you can pretty easily decide on the best way to spend your refund this year.

If you don’t have a months worth of expenses in an emergency savings, use the refund to grow that savings to move up the ladder. If you already have an emergency savings and you are already investing, your next step should be to attack some debt. Maybe you could use your refund this year to knock out a debt or two, starting with your smallest balances. On the other hand, you could have all of your debts paid off and have a healthy emergency fund, so you could use your refund to pay off more on your mortgage.

Ultimately, you really should just think through your tax refund before you just spend it frivolously. Getting a chunk of money like a tax refund is typically a rare event for most people. So make sure you use it wisely. If you want to think out some different ways to “spend” your refund on paper first, you should check out our Mini-Budget Tool. This tool will allow you to spend your refund three different ways and compare and contrast what the best decision is for you and your family.


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MONDAY MONEY TIP PODCAST: Maximize Your Tax Refund

This week on the Monday Money Tip Podcast, we’re sharing what you can do in order to maximize any tax refund that you may receive this year! We know that many people will receive a tax refund and we want to make sure you are able to maximize any money that comes your way! In addition, we will be sharing a success story from a man who created a budget and was able to pay off three medical bills and begin tithing consistently!

It’s our goal at the end of each episode that you gain hope and encouragement in your financial journey, you’re equipped to take a next step, and that you’ve had FUN with us!

Find the Monday Money Tip Podcast HERE. Please let us know what you think by leaving us a rating!

Email to ask questions or share success stories.


Show Notes

About the Episode:

  • Hear a success story about a man who has paid off three medical bills since attending a Financial Learning Experience.
  • Get advice on what you should do with your tax refund this year.
  • I’ll share how you can use our Mini-Budget Tool to make decisions about your tax refund.

IWBNIN Next Steps
Mini-Budget Tool

Quote of the Day: “When you tell your money where to go, you’ll never have to wonder where it went.”


How To MAXIMIZE The Use Of Your Tax Refund

If you are among the large majority of people who receive a tax refund, you will soon face this question:

“What should I do with my tax refund money?”

Most people have an immediate response to this question. Here are some common responses I receive when I ask this question:

  • “I’m going to pay off my credit card with it.”
  • “I’m going to buy something with it.”
  • “I’m going to use it to pay my property taxes.”

Most people have an idea of where they will use their refund, but it is usually for something they feel is URGENT not the most IMPORTANT.

To maximize the use of your tax refund this year, I recommend you follow the following decision matrix. When you arrive at the step matching your current situation, you will have discovered the one that should help you most!

  1. Do you have $2,500 in your emergency savings account? If you do not, this is the best way to maximize your refund! It will create margin in your life and breathing room for your budget. I’ve never heard anyone say, “My biggest regret is that I saved too much money.” If you do have at least $2,500 in your savings account, move on to #2.
  2. Are you investing enough into your retirement account? If you are not investing enough to capture the full company match (or at least $100 if your company does not provide matching funds), this is your next step. We call this Rung Three of the I Was Broke. Now I’m Not. Ladder. Use the tax refund money to make up your retirement contributions for the 2013 Tax Year (you can do this through the personal income tax deadline of April 15, 2014). If you are investing enough into your retirement account, move on to #3.
  3. Can you completely eliminate a debt with the tax refund money? If you can, do it! If you have two or more debts you could eliminate (but have enough money to eliminate only one of them), choose the debt with the largest monthly payment. This will help you create more monthly margin. If you are not able to completely eliminate a single debt, apply the tax refund money to the smallest amount you currently owe using the Debt Snowball Technique. This is Rung Four of the IWBNIN Ladder. Already debt free except for your home? Move on to #4.
  4. Do you have at least 3 months of expenses saved up? If not, this is a great use of your tax refund money as it will build an even larger amount of financial margin. More margin equals less stress. If you have already achieved this rung (Rung Five), move on to #5.
  5. Are you investing at least 15% of your gross income into tax-advantaged investments? This is Rung Six of the IWBNIN Ladder. Use the tax refund money to build up your retirement, college, and dream investment accounts. You’ve become an incredible money manager at this point which means you will recognize how awesome it is to be able to boost these accounts with your tax refund.
  6. Attack the home mortgage. This is Rung Seven of the IWBNIN ladder. At this point, your tax refund will enable you to gain even more momentum toward complete debt freedom. Nothing better than that!
  7. Increase your investments to at least 30% of your gross income into tax-advantaged investments. This is Rung Eight of the IWBNIN ladder. At this point you are funding a legacy that will literally allow you to bless multitudes. Way to go!
  8. Fund a dream. This is Rung Nine of the IWBNIN Ladder – “Live a great life!” Use the tax refund to fund one of your dreams or someone else’s dream.

My one big EXCEPTION:

  • An investment that provides immediate (or nearly so) additional income. Suppose you were receiving a tax refund of $4,000. If you had the opportunity to invest this money into business dream which will produce additional income for you, then it could be a great use of your tax refund. For example, you could use the money to purchase inventory for an on-line Ebay store. If this would allow you to produce additional income in the future, then it could be a way to multiply the impact of your tax refund.

What are you going to do with your tax refund?

I’m Paying What?!?!

WARNING:   Participating in the below activity can lead to increased blood pressure, frustration, and possibly anger.

Have you ever given much attention to the deductions from your paycheck?

Here’s what I know.   If you don’t personally pay the bill and an expense is paid out of your paycheck before you ever receive it, chances are REALLY HIGH that you will be shocked to discover how much you are really paying!

I challenge you to pull up your paystub from the last paycheck you received in December 2010 and look at how much has been taken out BEFORE you ever received the check.

How much did you pay last year for:

  • Federal Income Tax
  • Social Security Tax
  • Medicare Tax
  • State Tax
  • Local Tax
  • Insurance Premiums

Now take those amounts and divide them by how much you were paid last year.   What percent of your pay was taken out to pay for taxes and insurance?   After you have taken your heart medicine, would you mind sharing your percentage in the comments?

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