I’m a 20-something living in NYC, and I work full-time and freelance on the side here and there. I just filed my taxes, and I should receive a total refund of approximately $1,100. I don’t have any credit card debt (anymore), but I do have some student loan debt that I’m still paying off. I should mention that I’m in the process of moving to Chicago, and I might have to purchase a car once I’m there (although I’d rather stick a fork in my eye). I’m also trying to save for my wedding. So, should I throw my entire refund at my student loans? Or should I put my refund into savings? — K.
So I’m posting this question because a lot of people have been emailing me variations on this same question: I’m getting a refund this year—what should I do with it?
There’s no one right answer to this question because people earn different amounts of money, have circumstances that are unique to them, and have different priorities. Not everyone has student loans, or weddings or houses they plan on buying. If I were the letter writer above, I would not throw the entire refund at my student loans—I’d squirrel it away into savings and decide what to do with it after I made my move to Chicago. Moving is expensive, and it often comes with unforeseen costs, so that $1,100 will come in handy when the time comes (and that time will definitely come if it’s discovered that a car is indeed needed after the move).
Let’s talk more broadly about what we should think about when getting our tax refunds (if we’re lucky enough to be getting tax refunds this year). The first thing you should think about: Do you have an emergency plan in place if you lose your job? It’s a good idea to have at least $1,000 in a savings account just in case (emergency money). I’ve mentioned this before, but financial “gurus” usually say you need three months, or six months or a year’s worth of savings to fall back on if you lose your job. This is an arbitrary rule of thumb. What they really mean is: What would you do if you lost your job? Some people don’t have family or friends who would let them crash with them if they couldn’t make their rent or lost their home, so they absolutely need a pile of money to fall back on in those circumstances. But a lot of us do have people who could let us crash on their couch or sleep in a spare bedroom while we get back on our feet, so it’s not as necessary to hoard as much cash for “emergency savings.” So have $1,000, and then go from there depending on what your emergency plan is.
Next up: Retirement and debt. If you’re worried about what you’re going to do when you’re retired and don’t have a retirement account, open one up. That’s what you should think about next. See here. (Note: Personally, I save for retirement, but am not too worried about it. That’s because I expect to work past the typical retirement age of 65—not because I’m afraid that I won’t have enough to live on, but because I like what I do! It’s not like I’m going to stop writing once I hit 65.) If you have high interest debt, you should definitely pay those down, because investing in a retirement account won’t do you any good if you have, say, credit cards with killer interest rates. So make paying down that debt a priority.
If you have your emergency plan and debt/retirement in order, sure, you can use the refund to tackle your student loans if it really bothers you, or put it towards a down payment for a car or house, go on vacation, or buy yourself something nice. You know what’s important to you and what your priorities are. After you take care of the big things, you can do whatever you want with your money.