3 Best Things To Do With Your Tax Refund

I’ll never forget the first time Megan and I sat down with our financial advisor.

We were 22 years old and oh-so-eager to develop a financial plan for our future.

I had visions of us saving for retirement, giving generously to our church, and buying some “much needed” stuff for our new house.

You know, like “man-chairs” and gas grills.

Then, after looking over all of our finances, our advisor looked us dead in the eye and said something that was really embarrassing to hear.

“You don’t have enough money to live the life you’re currently living”.

You want to talk about feeling small. Our debt to income ratio was a bit out of hand. We had a new mortgage, two leased cars, two student loans, a few thousand in credit card debt and nothing in savings. With a starter youth pastor salary and a starter loan processor salary, (yep Meg did that for a season) we were in way over our heads. It was at that point our financial advisor gave us the best advice we could’ve ever received.

He said, “People don’t plan to fail they fail to plan.”

Now later, I would realize that was pretty cliché, but to me at the time, it was revolutionary.  Still, it took a few more years of doing stupid stuff with money before I realized that we needed to have strategic plan for our money each month. A strategic plan that included 3 things:

 

Spending. Saving. Giving.

 

In order for you to live the full, well-rounded, meaningful life you desire, managing your finances wisely is going to be a KEY factor.

Right around this time of year, you will most likely receive a tax refund. And although it might seem tempting to go on that dream vacation, buy that new car, or go on a serious shopping spree, you have to first assess where you are financially.

For some of you who have been disciplined with your finances, you may be in the perfect position to spend all of it on something fun for yourself.

Others of you, who have consumer debt, student loans, or car debt should consider spending the money paying down your debt.

Others of you have been so blessed in life that you may want to consider giving it to someone in need, your church, or another great non-profit organization (like NoSmallLife.me).

Haha, JK, but a little serious. 😉

 

The Bible talks so much about managing money. And what we often fail to realize is that if you devise a smart plan that includes saving, spending and giving, you will be able to win with money! And long term, you’ll be able to create a less stressful life for yourself, even if you don’t make a ton of dollar bills…ya’ll. Sorry I had to.

So, what does a wise financial plan that includes these 3 elements look like? Let’s jump in:

 

Spending

Based on advice from my financial advisor/long- time friend Steve, and Dave Ramsey’s book The Total Money Makeover, I believe you have the green light to spend your tax refund IF you are in the following financial situation:

1.     You have no debt other than your mortgage. This includes auto loans, student loans, credit cards, and that “interest-free-12-month-same-as cash-loan” you got at Home Depot. They get ‘cha don’t they?

2.     You have a 3-6 month emergency fund in your savings account. Your Roth IRA or 401K doesn’t count.

3.     You have a 15-year-fixed rate mortgage that doesn’t exceed more than 25 percent of your monthly take home pay.

Ok, ok please put down the stone you’re about to throw at me.

I know it is way more fun to spend your money on memories or things, but the freedom you’re craving will actually come when you start attacking these debts.

Here’s how:

List your debts smallest to largest regardless of interest rate (other than your mortgage) and start paying them off in that order, smallest to largest.

Each time you pay one off, you will feel so much better about yourself. Believe it or not, and maybe this is my “nerd” showing, paying off debt can be fun! I’ll never forget when I paid off my student loan and then my last car payment. Having no debt other than my mortgage felt so amazing! I felt so free!

If you’re in that financial position, you have been working hard and sacrificing so much. I would say go spend a little and have some fun. Create that memory. Take that dream trip you deserve. If you’re not yet in that position, lets put that dream trip on the back burner for now and use it as motivation you to pay off your debt faster.

 

Saving

If you have all of your debt (other than your mortgage) paid off, but you have nothing in your reserves in case of emergency, then this year’s refund is for saving. What typically happens is that we pay for emergencies on a credit card because we don’t put any money  away in case of emergency. Putting a grand on your credit card when your car breaks down or your washing machine takes a dive can take a really long time to pay off. It also costs you money in interest if you can’t pay it off at the end of the month.

A few months ago we had an incident. Our stove and dishwasher became co-conspirators and decided to stop working the same week. They were in cahoots. Thankfully, because Megan and I had an emergency fund, we were able to pay cash and replace both of them. It was a bit of a nuisance and I hated spending that much money at one time, BUT the point is, we had it. We replaced them. A few years ago we wouldn’t have been able to do that.

(SIDE NOTE:  We’ve actually cut up all of our credit cards just so we couldn’t default to them on such “emergency occasions” and I can’t tell you how freeing it is.)

It may also be a good time to save this money if you have nothing saved for retirement. My advisor had Megan and I open a roth IRA and invest in good growth stock mutual funds that have a strong track record for longer than 10 years. We invest solely in mutual funds. However, we didn’t open that roth IRA until our emergency fund was fully funded. If you’re eager to start investing but don’t know where to start, just visit to Daveramsey.com and click on ELP. (not a paid sponsor, just a huge fan 😉 )

 

Giving

There are 3 scenarios that I foresee where people should give some or all of their tax refund away.

1.     You are currently not tithing or giving at all. Even if you are in debt, giving some of your money away each month will do 2 things:

•        keep you from becoming greedy

•        allow you to leave a legacy that can transform lives

2.     You are debt free. Sometimes we give out of a need for approval and to keep up appearances even though we are not in a position to do so. Don’t do that to yourself. The bible says that,

“the borrower is slave to the lender.” Prov 22:7  

Get yourself out of debt and then you will be able to give so much more! If you are debt free and have an abundance, you will find so much joy in giving if you aren’t already doing so. Try it!

3.     God is leading you to give. I’ll never forget when Megan and I finally paid off our cars and started saving our emergency fund. We no sooner paid it off when we felt “that nudge” from the Lord to give away our car to someone we met in need of transportation. Now my car was nothing fancy, but it was mine, and it was paid off. But ironically, saying that “yes” to the Lord was a really easy decision. We followed God’s prompting even though we were not in the best financial position to do so. And we were and are so glad we did!

Many times we try to fill the void in our lives through buying stuff and going on fancy vacations, but the reality is, giving is so much more fun. The Bible says in Acts that,

“it is better to give than to receive.”  

When we can take our eyes off of ourselves and give to others in need, our world gets bigger and our hearts and lives begin to change.  “Give” (see what I did there) it a try. You will get addicted to it.

So there you have it. There are pretty much only 3 things you can do with that golden ticket of a tax refund and truly, with money in general. Don’t allow debt to make your life feel small. You are the boss of your money. The effort is worth it to get yourself in a position to:

Spend it, save it, or give it away.

Which one of the three are you going to do with this year’s tax refund?

Until next time,

Chris

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