Woohoo! Since I landed my first big job as the Young & Free Maine Spokester last year, this is the first tax season that I actually received a big tax refund. I felt so rich! There were so many things I wanted to buy with this bonus cash. Shoes, concert tickets, new accessories for my camera…
And then reality came crashing down on me in the form of a student loan bill. Earth to Kylie! Turns out I still owe tens of thousands of dollars for my undergraduate education. Woof.
I looked longingly at my checking account, now plump with the money returned to me by the IRS. I could feel myself being pulled in two different directions. The logical, practical side of me said, “Use half to pay down your student debt and put the rest in savings.” On the other side, the free-spirited, fun-loving part of me taunted, “You deserve a treat! Plan a big trip to the city. Get a new outfit! Upgrade your camera kit!”
Both sides of the argument were convincing, but which was the smartest decision? Which side did I choose?
Well, neither, actually.
I picked the best part of both sides, and decided to spend my tax refund in both a practical and fun way. Here’s how I broke it down:
- 60% to high interest student loan debt
- 20% to my “new car fund”
- 10% to general savings
- 10% to a concert trip in Boston
I decided to take a big chunk of my return and immediately dedicate it to my student loans with the highest interest rates. By targeting the highest interest rates first, I’ll save myself money in the end. When making extra payments on my student loans, the money goes directly to the principle, so I’ll pay less interest over the life of the loan. It felt good to see that principle balance decrease before my eyes. I’m one step closer to being free from my student loan debt.
Since my Spokester term is coming to an end, so is my time with The Green Machine. I sold my personal car at the start of my term last summer, so I’ll have to find a new vehicle to get around in very soon. I contribute a small amount of money to my “new car fund” each week by automatic transfer through my CU’s online banking platform. Adding 20% of my tax refund gave the fund a big boost. I’ll use the money in this fund for a down payment on vehicle. A bigger down payment means a smaller monthly payment.
I split the remaining money equally between two categories: general savings and a trip to Boston for a concert. Sure, I could have been doubly responsible and put the entire 20% in savings, and maybe that would have been the smartest decision. However, giving in to just a little bit of temptation will likely keep me on track, and happy, in the long run. I planned the Boston trip carefully and stuck to my budget. Success!
When you’re deciding how to use your tax refund, ask yourself these questions:
- What are your long-term financial goals?
- Do you have debt?
- Do you have a major purchase to make in the near future?
- Can you budget a small percentage for “fun money” without impacting your long-term financial goals, debt and any future major purchase?
Stay on track and enjoy your Monday, everyone!