In the 1986 classic movie Wall Street, Bud Fox (played by Charlie Sheen) is a young up-and-coming stockbroker who’s trying to make his mark in the world of finance. As he’s adjusting his tie before a big meeting with the titan Gordon Gekko, he says, “Life is made up of a few big moments. This is one of them.”
Well believe it or not, if you expect to receive a tax refund check, you’re coming up on one of your “big moments.”
Every year, many people blow this chance to get ahead. They spend their refund on a big, frivolous purchase or take a vacation. While these might feel like fine short term uses of a refund check, there are several that could change your life, remove your debt, or help you build your business or security.
Here are my five favorite uses for a refund check:
1) Wallop some debt. Here’s your big opportunity to focus on your art more. If you’re drowning in debt, you may find that your attention is focused more on side-jobs and instant income opportunities than the big picture. Clear your mind by getting rid of some debt payments.
For best results, tackle smaller debts first. Wiping these payments out creates breathing room for your budget. If possible, use the money you save on these payments to tackle bigger debts next. Soon you’ll be on your way to being “debt-free” and focused on your income opportunities instead of the mountain of bills on the counter.
2) Build your emergency fund. This one is especially important if you’re earning money from your craft. It’s more important for entrepreneurs to have an emergency fund than anyone else because (in my experience) people with uneven income find they have to dip in to reserves between opportunities. You may read that emergency funds should have three to six months worth of expenses. While that’s a great goal, if you’re starting from zero, try to secure at least $1,000 quickly. Most emergency bills are less than this amount.
Long term, your emergency fund should be at least six months worth of expenses. Why? By building a big reserve you can wait for the right opportunity to showcase your craft instead of focusing on the “quick buck” that might not be an ideal option.
3) Invest in yourself. Are you an actor? Sign up for classes or coaching. An artist? Find a retreat. Whatever your craft, use your tax refund to gain new skills, build new artistic “muscles” and improve your work.
People often feel guilty about spending money on a craft that doesn’t yet return any (or much) money. Don’t. The only way you’re going to gain skills is to invest in yourself. Without the valuable knowledge it takes to excel, how are you supposed to reach excellence? While we’ve all heard of the prodigy who just one day “got it” when it came to their craft, more often the road to success is through hard work and experience. Buying more time with your craft is a great investment that you should be proud about, not ashamed of.
4) Invest in your business. Let’s be frank: most of us could use better business skills or marketing work. Improve your website (or create one), buy business cards, hire a bookkeeper, or purchase that expensive tool that’ll take your craft to the next level. If you can increase your ability to earn an income, you’ll turn 2013 into the year your art really took off.
There’s a fine line here. I’ve met people who blew their entire tax refund on items they said they really “needed,” when deep down they knew that more cool toys wasn’t going to create a brighter future. Think closely. Would it be better to work on your business and marketing skills or invest in new tools? Don’t buy the item that’s a crutch. Expand your comfort zone.
5) Invest in your future. Finally, if none of these work for you, put the money into an IRA, Roth IRA, or investment account for later. You’ve heard the parable about the animals using the summer to build reserves for the winter. At some point you’ll need funds, and an investment account will work for you to build these dollars.
While you’re at it, maybe it’s time to rethink the tax refund, especially if you’re currently struggling between paychecks. If finances are tight for you, ask your tax preparer what adjustments are possible to your withholding. By making some changes, you might be able to loosen the budget today to get out of debt and build your work more quickly, rather than wait for next year’s tax refund check.