AMES, Iowa – A tax refund is always a welcome bonus. Whether it’s $500 or $5,000, the way you use that money can have a real impact on your personal and financial wellbeing.
Barb Wollan, a human sciences specialist with Iowa State University Extension and Outreach, offers some suggestions on how to use your tax refund.
“I’m not suggesting ‘right’ and ‘wrong’ ways to use your refund. Only you can decide what’s best for you and your family,” Wollan noted. “I do, however, suggest you keep in mind four general considerations before spending your refund."
Plan ahead before your refund arrives. Without a plan, you might use the money on the first valuable thing that comes to mind, and then later realize something else was more important. Planning ahead and involving the family increases the chances you will identify all the possibilities and think about which are most important.- Keep in mind that it will be a full year before you receive another tax refund. Consider the possible needs and goals that you will encounter throughout all of 2023 before deciding how to use your refund. For example, you could set some money aside for car repairs or new tires, or for back-to-school expenses or holiday expenses later in the year.
- Consider ways your refund could help to build long-term financial security. These might include paying down high-interest debts, boosting your emergency savings, or setting some money aside for retirement or college expenses.
- Don’t throw away part of your refund on loan fees. “Companies that offer ‘quick refunds’ are just giving you a loan,” Wollan said. “It’s a high-cost, high-risk loan that could come back to bite you if your refund is held by the government to pay back student loans or other government debts.
“People are often most satisfied with their use of their tax refund when they balance long-term goals with shorter-term goals,” said Wollan. “That often means putting some money toward the ‘big picture,’ while using some of the refund for something that makes your life better or offers enjoyment now.”
Wollan offered one final tip related to tax refunds. “For those who get big refunds, but experience extremely tight finances during the year, it sometimes makes sense to reduce the amount of tax that is withheld from your income. This reduces the size of the tax refund but offers larger monthly paychecks year round.”
For some families, making this change helps to prevent overdue bills, late fees and other financial stressors during the year. If this could be helpful to you, Wollan suggests talking with your employer’s payroll department to arrange to have less tax taken out of your paycheck.
ISU Extension and Outreach specialists are available for individual financial consultations with Iowans who are working toward financial goals and would like some information, tools or strategies that would assist them. Find your regional specialist at www.extension.iastate.edu/humansciences/finance.
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