It’s tax return season and that means a significant amount of money may be heading your way! American average tax refund for the 2020 tax year was $2,827, with 91% of the refunds coming through direct deposit.
Direct deposit is convenient, but it also makes it easy to forget about your incoming tax refund. Thankfully, if you plan out your spending, you can stretch your tax refund to accomplish one or more of your goals.
It’s all about mindful spending.
What Is Mindful Spending?
Simply put, mindful spending is being aware of how you use your money. This includes how, when, where, and why you’re utilizing your funds. It’s not about stopping spending. Instead, it’s making sure you’re fully present in your financial decisions.
With today’s technology, it’s easy to spend money without much thought. As Derek Hagen, founder of Money Health Solutions notes, “there should be a slight sting that happens when we spend our money. This is largely gone. When we link an account to an online store or app, we’re not aware of our spending.”
How to Practice Mindful Spending
Here are three steps to get you started on your mindfulness journey.
1. Detect Spending Trends
Kick off your financial mindfulness by assessing your current behaviors. Hagen recommends using an account aggregator tool to link your accounts and see them all in one place. One example is Axos Bank’s Personal Finance
Manager (PFM), where you can view all your accounts in one dashboard. Tools like PFM give a holistic view of your accounts so you can monitor your overall spending and savings habits.
2. Review Each Transaction
Ask for physical or emailed receipts. “Once you have the receipt, you can consciously look at the amount and mentally note how much you spent and what you spent it on,” said Hagen. “The point isn’t to judge or interpret; the point is simply to be more aware.”
3. Pause Before You Purchase
Wait a moment before you spend. Dr. Alex Melkumian, founder of Financial Psychology Center in Los Angeles, recommends asking yourself the following before each transaction, big or small: “What state of mind are you in? Are you impulse buying to satisfy an emotional need? Are you overspending to impress your community?”
Wait 24 hours to make that purchase. If it’s no longer top of mind, perhaps you can do without.
Applying Mindful Spending to Your Tax Refund
Your tax refund is a great opportunity to put mindful spending into practice. Whether you’re looking to buy something fun, cover practical expenses, or add to your savings, think about how your choices work into your overall financial picture.
1. Fun Purchases
It’s fun to reward yourself for your hard work. Your tax refund gives an opportunity to purchase something you’ve been eyeing or earmark the funds for an ongoing treat. Let’s say you receive a $2,800 tax refund and live in an area with 7.75% sales tax. You could use your refund to purchase:
- Shoes. You could add 14 pairs of $185 designer kicks to your closet. Or you could buy one or two and divert the rest to savings. No judgement here!
- Coffee Drinks. Like to swing by a coffee shop on your way to work? Your refund could get you more than a year’s worth of daily $4.50 lattes – 577 to be exact.
- Movie Dates. If movies are your thing, you could reserve your funds for a weekly date. Assuming tickets, popcorn, and soda for two is roughly $50, you’re set for nearly the full year.
2. Practical Spending
Some expenses aren’t as fun. But it’s gratifying to know they can be paid without having to dip into savings. For example:
- Credit Card Debt. On average, Americans carry $6,006 in revolving credit card debt. Using your tax refund to pay down your balance reduces the interest you’ll have to pay.
- Car Maintenance. Oil changes, air filters, tire changes – they don’t come cheap. AAA reports auto maintenance costs an average of $792 per year, with tires adding an extra $150 per year. Create a car savings account with part of your refund to cover these expenses for the next year.
- Home Repair and Maintenance. Angireports U.S. home maintenance costs approximately 0.5% to 1% of a home’s value annually, including landscaping and cleaning costs. Start a home maintenance savings fund so the money is there when you need it.
3. Prudent Savings
If you’ve noticed your saving has tapered off, you may want to use your refund to create a new habit. This
- Emergency Fund. A general rule is to have at least six months’ worth of expenses set aside in a savings account that you’ve reserved for emergencies.
- Retirement Savings. Once you’ve established an emergency fund, consider saving for the future. Your tax refund is a great opportunity to start an individual retirement
- Educational Savings. Have kids? If you already have emergency savings, it may be time to save for school. Use our college savings calculator to create a savings goal.
Make Your Tax Refund Stretch Even Further
Choosing the right account can make a noticeable difference. Take advantage of high-yield savings and
rewards checking accounts to keep your tax refund money accessible while helping it grow. You may also consider a debt consolidation loan to reduce the interest paid on any credit card or other high-interest debt you’re not able to wipe out with this year’s tax refund.
You’ll also want to check in regularly to assess how you’re doing. “Your financial perceptions will change over time,” said Melkumian. “It’s good to check in on your perceptions of your financial situation throughout the year.”
If you need a motivation boost, we have an entire library of articles with spending and budgeting tips, including How to Build a Roadmap to Crush Your Financial Goals. Visit often for additional money-saving ideas.