The Tax Refund Pyramid
It’s that time of the year again, when CPAs go into overdrive, when citizens fret over their deductions and credits, and when those receiving a tax refund get to ask the age-old question: What do I do with all this money?!
Yes, it’s Tax Time!
While I’m not a huge fan of massive tax refunds (which typically mean the government is taking out more from each of our paychecks they we should let them… it’s generally a better idea to get more out of each paycheck than it is to give the government an interest-free loan on the money that they’re keeping from our paychecks), there are some great things that households can do with whatever funds the government sends them back in the next few months.
Here’s the essence of the Tax Refund Pyramid:
- NEEDS: 30%
- DEBT: 25%
- SAVE: 20%
- INVEST: 15%
- ENJOY: 10%
As an example, a household receiving a $2,000 tax refund might consider doing the following with their money:
|Expense||% of Refund||Amount to Spend||Uses|
|SAVE||20%||$400||Place into Savings Account(s) for Future
|INVEST||15%||$300||In Retirement Account (401k, IRA, etc.)
Just figure out your own tax refund pyramid and enjoy!
I would suggest, though, that even before the refund check arrives (by mail or direct deposit) you decide where to spend it. From the time you submit your tax return until you receive the money in hand (or in the bank), you should typically have at least between 10 and 15 days… and many more if you’re requesting a mailed check. That’s plenty of time to make your decisions. The sooner the better. Otherwise, with check in hand (or in the bank), emotions take over, and we’re significantly more likely to spend that money on one large (and often unnecessary) purchase.
And that’s how you build your very own tax refund pyramid. Easy enough, right? And by taking care of your needs, paying down your debts, saving and investing for your future and enjoying yourself, you’ll be feeling like a financial Pharaoh in no time!