Note: This is a post from Joan Otto, Man Vs. Debt community manager. Read more about Joan.
Tax season is hitting full-force here in the US! Our taxes have been done since early February, thanks to my own OCD record-keeping and our accountant’s desire to get us in and out as early as possible each year, what with our 80 streams of income and all that.
But after a couple years of paying in some hefty figures around this time of year thanks to self-employment taxes and some other strangeness, this year, we are getting refunds from both state and local.
Those checks hit my bank account this week, and as I share my financial update for this month, I thought it might be a good time to talk about tax refunds – and the best plans for them!
March by the numbers
As of this weekend, our total debt is down to $51,769.65 from its high of $89,686.23. That means we paid off $905.59 this month and $37,916.58 since early 2011! We’re now 42.28 percent debt-free – closing in on halfway there!
While we didn’t hit any of our Very Next Step goals this month, I’m happy that even with our major changes in our financial situation over the past half-year, we’re making significant progress each month.
You can always check out all of my progress and Very Next Steps in detail on my Joan’s finances page!
So are tax refunds a good thing?
In addition to my debt going down significantly this month, my savings and checking accounts went up! That’s due to some hefty side hustles and, of course, the aforementioned tax refunds.
The thing is, I’m generally against giving anyone an interest-free loan. And, look, if you’re getting money back from the IRS or the state revenue department, that’s what you’ve done.
But in this case, I’m more than OK with it. In fact, while things will be different later on, Chris and I decided last year that until we’re debt-free, we’re purposely going to err on the side of overpaying the IRS, because we just need the mental freedom of not having to worry about owing them anything!
If you’re just not conscious of the amount you’re paying in, and you’re ROUTINELY getting a large refund, I encourage you to check out your withholdings and consider an adjustment. But if, like me, your income varies and you’ve been bitten in the past by a tax bill you had to scramble for, well, maybe let the government hang on to some of that cash earlier, and then take it back in March or April, yeah?
What are you doing with your refund?
So what if you ARE getting money back? It definitely can be good, but it can definitely get wasted, too. Over the weekend, I asked our Man Vs. Debt community on Facebook what their refund plans were.
Paula, who is debt-free, said she’s putting hers toward a home-improvement fund. They want to fix up their house to eventually sell it and move to something smaller. Good plan, Paula! (And YEAH for debt freedom!)
Chris said, “Went towards my highest interest student loan!”
Linnea said, “A lot of our refund went to pay off debt and then we put away some to help pay for a future baby, which was good since we found out a few weeks later that we’re pregnant!” Congrats, Linnea, and GOOD planning!
Dayna had a mix of needs: “Ours went toward some things we needed, debt, catching up on bills, tithing, food and water storage, and saving a little of what’s left over.”
One of our most amazing You Vs. Debt grads, Katie, said she and her husband are splitting their refund and each using it to tackle their most hated debt.
And Laura said she’s getting a much-needed new roof, while my buddy Jenna is going the new-windows route.
All of these things sound awesome. In our case, we don’t have anything “spectacular” planned – no big hit against a single card, or anything like that. Instead, since we’d been paying just marginally over the minimums on all our debts for the past few months to avoid dipping into our savings while Chris transitions between jobs, we’ll likely try to get caught back up to where we expected to be at this time on the various accounts.
So nothing will get a turbo-kick, but at the same time, I’ll feel better about where we are!
The problem, of course, is when you don’t have a plan. When the $500 or $5,000 you get back at tax time just goes into the checking account and somehow… vanishes, in a steady stream of $50 dinners out or $100 trips to the mall?
That’s what I rail against at this time every year. My stream of friends does not exactly look like the Man Vs. Debt community – it’s full of good people who are in a good bit of debt taking thousands of dollars and turning it into designer sneakers and big vacations.
And I’m not judging that, because I’ve been there – and because I’m a BIG fan of having a bit of fun, too, as a way to stay motivated for the long haul. In our case, I got a new messenger bag, which I’d been eyeing for a while, and Chris and I took an evening and $60 and headed to our local casino for a buffet dinner and some penny slots.
The difference, again, is that we had a plan. Not everything we wanted to splurge on, but a few things. Some money set aside for expenses we know are coming and want to have a buffer against.
And then, back to tackling the credit cards.
So what are you doing with any tax refund you might be getting this year? Or, if you’re not caught up in the wonder of the US tax system, what about any other “windfall” or large sums of money – what do you do with them?
What’s your PLAN?
We’d love to hear in the comments!