What to do With Your Tax Refund

Updated April 4, 2021 | Listen to the Mind of a Millionaire Podcast on iTunes, Spotify, or Stitcher.

 

[0:44] Every year, come tax season, I receive the same question from investors: “What should I do with my tax refund?”

And, every year, I revert to my usual answers: pay off your consumer debt, establish a cash reserve, assess your insurance, invest at least 15% of your income toward retirement, save for your children’s education, and pay off your mortgage.

Then, in the wise words of Dave Ramsey, you can “live and give like crazy.” As I contemplated this annual podcast, I felt there was a more critical factor concerning your tax return: your money’s purpose.

WHY

[1:37] Generally speaking, if you listen to the Mind of a Millionaire podcast or read our blogs or work with us, you’re probably already taking those steps mentioned above. If that’s the case, your tax refund often comes with a decision, and a tough one at that: Do you invest that money for retirement or treat yourself to a new mountain bike or golf clubs or a new laptop (whatever your preferred toy may be)?

The bigger question is, at what point is your dedication to long-term financial independence limiting your current lifestyle?

[2:14] As I drudged through usual tax refund stats—the average refund is $2,500; 34% of recipients plan to pay down debt; the average student loan balance is $35,000—I felt overcome by the why. You thought this was a run-of-the-mill tax refund blog/podcast. Oh, no. Dust of your Psychology 101 textbooks, we’re getting deep.

For investors who are serious about financial independence, we’re chasing freedom. The goal isn’t merely to cap off an emergency fund or to pin down the appropriate amount of insurance; the goal is long-term freedom.

[3:04] In a capitalist society, whether you like it or not, wealth accumulation provides freedom—freedom from work, freedom to travel, freedom to retire with a life that you envision. Hence, why an intelligent investor may use her tax refund to complete the financial independence steps that I touched on in the introduction.

This year, when (if) you receive your tax refund, think, “what is my goal with this money?” Not, “what should I do with this money?”

WHAT IS MOST IMPORTANT TO YOU RIGHT NOW?

If you have consumer debt, pay that off. You cannot truly experience financial independence if creditors are following you. If your emergency fund is running low, then fill it back up with that tax refund. That should be your priority.

Perhaps you’re content with you’re current financial lifestyle—you’re on track to retire at 60; you enjoy your job; things are good—and you want to splurge on that shiny new recreational vehicle parked in the sales lot a few blocks over.

I get that, and I respect that. BUT! (There’s always a but.) But, it would be wise to examine that decision closely. Again, have a conversation with yourself: what is most important to you about your money? For most folks, the answer to that is freedom and financial independence.

FINAL THOUGHTS

[5:42] When (if) you receive a tax refund this year, refrain from pulling up that online shopping website. As tempting as that may be, instead think about your long-term objectives—what is truly your goal with that money?

This was a short discussion, but I hope you found it useful. If the information didn’t pertain to you, consider passing it along to someone who may find it valuable. Those who are important to you are important to us as well—if you know anyone who may benefit from our services, we would be happy to meet with them.

As always, call our office at (303) 261-8015 or schedule a free consultation to address your long-term financial goals.

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Disclosures

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Denver Wealth Management, Inc., a registered investment advisor. Denver Wealth Management, Inc. is a separate entity from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All information is believed to be from reliable sources; however, Denver Wealth Management, Inc. and LPL Financial make no representation to its completeness or accuracy.