Should You Spend Your Tax Refund? Only if You Agree to These Three Conditions.

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April 18 was the tax-filing deadline, and regardless of whether you filed your return at the last minute or weeks in advance, you may now be due a sizable refund. And if that is the case, you may already be planning to spend your refund on something that will bring you joy, whether it is a vacation, a wardrobe update, or the luxury bedding set you’ve been eyeing for months.

There is nothing wrong with using a portion of your refund to reward yourself if your financial situation allows for it. However, before you take that money and splurge, ensure that you can affirmatively respond to these three questions.

 

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1. Do you have a sufficient emergency fund?

You never know when life is going to throw a curveball your way. It’s critical to have money set aside in case this occurs.

If you do not have at least three months’ worth of living expenses in savings, you should hold off on spending your refund until you achieve that goal. Indeed, three months’ worth of bills is the bare minimum you should aim for, so even if you’ve met that requirement, you may want to hold off on spending the money the IRS sent you and instead save for six months’ worth of expenses.

 

2. Have you paid off all of your credit cards?

Credit card debt is undoubtedly bad news. For one thing, it may result in additional financial costs in the form of interest charges. It can also lower your credit score if you accumulate too many of them. From there, you may encounter difficulties obtaining an affordable loan or obtaining approval to rent a home.

If you have a nagging credit card balance, you should seriously consider paying it off with your tax refund. If there is money remaining, you may feel free to spend it. However, you should avoid splurging until your credit card balance reaches zero.

 

3. Are your longer-term goals on track?

If you’ve grown tired of renting and have been saving for a down payment on a house, a sizable tax refund could help you get closer to that goal. Additionally, if you’re in your 30s and haven’t begun saving for retirement, your refund may help you fund your IRA for the first time.

These are critical objectives to pursue. While spending your tax refund on something enjoyable may provide immediate gratification, using it to accomplish these goals is likely to benefit you more in the long run.

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Should you spend your refund?

Everybody deserves a treat now and then, and your tax refund may be your ticket to something special. Simply ensure that your financial situation is stable enough to justify splurging. It may take some self-control to put that refund to good use rather than squander it, but you’ll likely be glad you took that route in the end.

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