Refund Rich: 3 Ways To Hold Onto Your Money After Tax Season

If you’re relying on your tax refund to do something other than save or pay off a debt (that’s up-to-date in payments), chances are your financial relief may be a temporary one.

While a refund may feel like an opportunity to go out and splurge, it could also be an opportunity to jumpstart a year of financial stability. In 2014, most taxpayers used their refund to pay off bills and make big-ticket purchases such as buying a car or paying for a vacation, according to CNN. Very few refund recipients used their money to increase their savings. But, saving your refund could prevent a lack of finances while on vacation or struggling to pay off that new car note when “Refund Rich” season is over.

Let’s do things a little differently this year.

 A refund is great. But, it’s nothing in comparison to having an emergency savings account to draw from throughout the year (instead of waiting for tax season again). Many people who begin saving with a small amount of money become discouraged at the slow growth rate of their savings account. Using your refund to jumpstart your savings is a great way to stay motivated and watch your money grow.

Though your ideal savings rate depends on your specific needs, Paula Pant, a personal finance journalist and creator of the blog Afford Anything, suggests putting 20 percent of your monthly income toward savings. According to the Victoria Advocate, financial advisers at Sather Financial Group recommend having, at least, six to nine months worth of living expenses saved for emergencies. They highly suggest saving your refund, if you don’t have emergency savings already. One way to think of it is you’ve already gone one year without being able to spend your refund. So, if you don’t have a current financial emergency, what’s one more?

If you’re not in the position to start a savings account, save on purchasing. Subscribe to newsletters from retailers who offer exclusive coupons to their email subscribers. Find out if your health insurance plan offers discounts on gym memberships. Learn when your favorite airline or hotel has the best deals. Shop the clearance rack or better yet, visit a resale shop. You can also purchase used or refurbished electronics. There are several websites, like LivingSocial.com and Groupon.com, that offer savings on restaurants, spa treatments, travel and adventure.

According to the IRS, 80 percent of taxpayers will receive a refund and the average refund will be around $2,800. The first mistake many taxpayers make is thinking of their refund as “free money”. But, it’s a refund. The money was already yours. It was returned to you because you overpaid your taxes during the previous year. Many financial planners advise taxpayers to receive more money during the year to avoid the hardship that leads to depending on tax refunds for financial relief. Otherwise, you could be giving the government an interest-free loan while you struggle to make ends meet.

Similar to a healthy lifestyle, developing good financial habits is a lifestyle change that takes patience, education, support and consistency. There are several websites, podcasts, social media groups and books to aid in your financial education. Take advantage of your free resources before you consider hiring a financial planner.

Keep track of your money by creating a budget based on your family’s priorities. Keep in mind that even the smallest purchases add up. Spending $30 on a pair of socks may not seem like much when you have a $2800 refund. But, unless you have an elaborate sock collection, spending $30 on a pair of socks after you set aside 10%, or $280, of your refund to splurge can seem a bit expensive.

Having enough money to purchase something is different from being able to afford it. Budgeting helps to distinguish between the two. Apps like Mint and Goodbudget can help you to track your spending so that you can get a better idea of where your money is going and find small ways to cut back on things like cell phone bills and cable TV. Expenses are easier to understand after they’ve been placed into categories like home, food, transportation, savings and entertainment.

Budgeting works best when you keep your priorities in check and avoid (emotional) impulsive purchases. Be honest with yourself about how much you can afford to splurge. Yes, that new couch is on sale and those new shoes just came out. But, if you couldn’t afford it before you received your tax refund, chances are you can’t afford it now. Take advantage of tax season by taking the time to reevaluate your spending habits and getting the most out of your tax refund.