Tax refund! Now what?

I actually don’t dread doing my taxes because I usually get a nice little refund. Did you know that the average tax refund is around $2,800? While there are some people who argue that getting a refund is not a good thing (because you could have received a bigger paycheck over the course of the year), I am all about the refund, especially now that I am much more conscious of my saving and spending. For me, the refund represents an annual opportunity to make some serious progress towards my financial goals.

I struggle a lot with how I should prioritize my emergency fund, retirement savings, and student loans. There is a lot of conflicting advice out there and after reading several articles, I developed a bad headache. There are basically two schools of thought:

1) The savers. Savers argue that the most important thing to do is to build up at least 6 months’ worth of emergency savings before you do anything else. Only after that should you focus on your retirement and max out your annual contribution, whether through an employer-funded 401k or a personal/Roth IRA. If the only debt you have is federal student loans, savers argue that it’s okay to prolong repayment because 1) the interest rates are low and 2) if you were to find yourself in a jam, like you lose your job, you can negotiate your loan repayment. You cannot take out loans for personal emergencies or retirement — that’s why it’s so important to have these taken care of before everything else. 

2) The “no debt”-ers: There is no good or bad debt, only debt, and you need to get rid of it ASAP. The main argument is that you could be doing so much more with the money that goes to your loan servicer every month. You should do whatever you can to pay more than your monthly minimum payment so you don’t have to pay interest longer than you have to. 

Both sides make a lot of sense to me. Initially I was inclined to put 75% of my refund towards my student loans, and then the remaining 25% split amongst savings, IRA, and my 2014 trip fund. But I’m nowhere near my emergency fund goal of $8,000 and the refund is an opportunity to get there. Similarly, I know that it will be incredibly hard for me to maximize my IRA contribution ($5,500 annually), but an extra contribution will still make a difference. 

I played around in Excel for a little bit yesterday and I think I reached an allotment that makes sense for me:

  • 36%: student loans (equivalent to an extra monthly payment)
  • 36%: emergency fund (this will get me to 40% of my goal)
  • 18%: IRA contribution
  • 10% travel fund contribution (might be enough to pay for one of my 5+ flights this year)

I realized that the sooner I achieve my savings goal, the sooner I can knock that off my priority list and focus on just two items: retirement and student loans. I literally love crossing things off lists (no, really) so I am going to write this down and keep working towards it!


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