Treat your tax return money (and any money you receive) as earned income, not as if it’s extra money to have fun with. It should go into your budget and should be used to pay down debt, build up your emergency fund, or to go towards your other financial goals. This does not mean you can’t spend it on anything fun, but not when it would be financially irresponsible. If you’re living paycheck to paycheck, or have mountains of debt, why all of the sudden is it OK to spend $1,000 on a TV, or a vacation? The government isn’t just handing out cash to people as early Christmas presents. For most who earn over 40-50k, your tax refund represents your over payment of taxes throughout the year. So essentially you give the government an interest free loan all year, and then they give it back to you in a lump sum. Wouldn’t you rather have that extra money in your paycheck?
Many of us need to adjust our w-4 withholdings to do just that. It should be mentioned that many households earning under 50k do not actually pay (income) taxes. Instead they qualify for credits such as the earned-income and child tax credit and end up actually getting money they did not earn back. It is even more important for these households to spend/save this money wisely and not foolishly spend it. If you qualify for these credits there is probably much better things to do with this money than to spend it on consumer “wants.”
I just wanted to get this out there before people start getting their refunds back. I know it is tempting to treat it like lotto winnings, but please resist the urge. If you get excited enough about getting out of debt it actually becomes fun to throw large chunks of money at it until its gone. (I know that sounds sick but it’s true) And if you’re married, and one of you is a spender and one is a saver, come up with a compromise. Set aside a little to have fun with and be responsible with the rest!
In case you are wondering, a cool thing my wife and I decided to do with some of our tax return money is to officially start Claire’s (our daughter) ESA (educational savings account). It is a big accomplishment for us and it’s something we are really proud of. Our plan is to be able to cover half of our children’s college and leave the other half for them. That way they have a sense of responsibility and hopefully are encouraged to do well.