The Tax Refund Pyramid

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
NEEDS 30% $600
  • Fix an appliance
  • Repair a vehicle
  • Purchase necessary clothing (e.g. for work)
  • Pay toward back child support
DEBT 25% $500
  • Pay off payday, title, or other high-fee loan
  • Pay medical bills
  • Pay credit card, store card and gas card debts
  • Pay down car loan
  • Pay down mortgage loan*
SAVE 20% $400 Place into Savings Account(s) for Future

  • Appliances or Furniture Replacement
  • Repair or Replace Vehicle
  • Medical Emergency
  • Vacation
  • Gift Giving (Birthdays, Christmas, etc.)
INVEST 15% $300 In Retirement Account (401k, IRA, etc.)

  • Retirement and Long-term Goals
ENJOY 10% $200
  • Fun
  • Recreation
  • Entertainment
  • Dining Out

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!

Todd Christensen-Author of Everyday Money for Everyday People, Todd ChristensenTodd Christensen
Everyday Money for Everyday People

*Many financial advisers suggest never paying off your mortgage since interest rates are typically much lower than the return you’re likely to earn on securities investments. Unfortunately, as too many learned during the housing downturn of the Great Recession, owing more on your home that what it’s worth takes away many importance choices the homeowner might want to make. For example, if you owe more than what your home is worth, moving away to take another job is often out of the question.

One thought on “The Tax Refund Pyramid

  1. Pingback: Money Pie & Tax Refund Pyramid Excel Calculator | Everyday Money for Everyday People

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