My wife and I often debate about whether it’s a good thing to receive a tax refund or not. I like to receive little to no refund. She’s on the side of the bigger the better.
I prefer to know exactly where my money is going ahead of time instead of being presented with a huge surprise of cash. My wife sees this as an opportune time for adding some more fun into our lives.
That’s why I love her. She balances out my nerdiness and helps me live a little. Over the years, we’ve volleyed back and forth about what is the “right thing” to do with this money.
Given that our relationship and financial status have evolved tremendously throughout the years, we’ve made a variety of decisions with our newfound tax refund money. Here’s what we’ve done.
1. Build an Emergency Fund
At the beginning of our relationship, we realized that we had a negative net worth. We were making good money together, but we were spending nearly a lot of it each month.
We made a commitment to improving our financial situation. Part of that plan would be to use any newfound money like tax refunds to build up our emergency fund.
Since we were making around $130,000 combined, a little trimming here and there in addition to a tax refund made our three-month emergency fund a reality rather quickly.
2. Pay Off Debt
To further increase our net worth, we knew we needed to eliminate my wife’s car loan of $21,000 and my student loan of $28,000. We wanted to do this before our daughter was born so we had a clean slate.
Each month, we would sit down for a “Budget Party” to review our spending and our goals. To make it more fun, we added some beer, wine, and pizza to make our monthly get-together. Who says you can’t have fun while planning your future?!
Over the next year, we paid down all of the debt, with a little help from the tax refund we received. Nearly $50,000 was paid off in 12 months. A little discipline, some newfound money, and pizza helped us get there.
3. Invest For Retirement
Since we didn’t really start seriously investing for our retirement until our early 30s, we knew we had some catching up to do. At 30 years old, we had around $21,000 in retirement funds.
Newfound money like tax refunds, commission checks, and bonuses helped us to begin maxing out tax-advantaged retirement options like our 401k, IRA, and HSA. Employer matching funds helped our chances of a comfortable retirement look even more promising.
We’re still decades away from retirement but we’re glad we’ve started consistently stocking away money. Time and compound interest will hopefully do the rest for us!
4. Save for a Home Down Payment
For a solid year during our marriage, nearly all of our money went toward a down payment on our “forever home.” I thought paying off debt and investing was fun. My wife thought buying a home was even better. Our opposite opinions were starting to pay off.
One day, my wife found that forever home. I fell in love with it at first sight.
We were both thrilled that we had saved up more than 20% for our home down payment. Our mortgage payment was reasonable and our growing family now had some space to stretch our legs.
5. Pay Down the Mortgage
Although the mortgage payment was reasonable, I hated it.
I didn’t like the idea of paying a mortgage for 30 years or even 15 years. That was too long!
To make things worse, I was not very happy with my job at the time. I started to feel trapped. With a big mortgage payment, I couldn’t change careers.
So my wife and I agreed that we’d start to aggressively pay down our mortgage so we could eventually live mortgage-free and give me some options for my work in the future. Tax refunds, earnings from selling stuff on Craigslist, and any other new money that came our way went toward the mortgage principal.
In less than 5 years, we had the entire $200,000 mortgage paid off.
6. Give It Away
As time rolled on and our wealth started to grow, we felt like we needed to give back more than we were. Our charitable giving after paying off our house was 1% of our take-home pay. We were ready to do more.
The next year, we decided to ladder up our giving. We reassessed our budget, researched charities that warmed our hearts, and used newfound money to help us give away 3%.
This move didn’t help us grow our net worth, but it helped us move toward the true wealth we were seeking. We kept the tradition going, and today we’ve created our own unique version of 10% giving.
7. Enjoy It
This year, we received a larger-than-normal tax refund.
As much as I wanted to save or invest this money (because I think that’s fun), my wife reminded me that it’s okay to enjoy your money today.
We haven’t fully decided what we’re going to do with it yet, but it’s looking like an updated garage, trampoline for the kids, a summer trip to Europe, and a hot tub are all on the list.
While a maxed-out IRA sounds tempting to me (nerd alert), I think my wife’s ideas sound like more fun this year.
We’ve put in the hard work. With no debt, built-up savings, no mortgage, retirement funds compounding, and a giving system we’re proud of, it’s time to live a little.
Next Step for You
If you’re ready to get started managing your money better, I recommend signing up for Personal Capital’s free, online financial tools.
My family uses these tools to track our net worth, keep an eye on all of our investments, and plan for long-term goals like retirement. On my website, I wrote a full review on how these free tools can help you build wealth.
Personal Capital compensates Andy Hill for providing the content contained in this blog post. Andy Hill is a paid content contributor and not a client of PCAC and does not make any endorsements or recommendations about securities offerings or investment strategy.