Before you run out and splurge with your tax refund, take this financial check up

While it may be tempting to splurge on a new spring wardrobe with your refund, tax season, even when you have a tax refund in hand, is actually the best time of year to do a financial check up first. Especially if you only take a good look at your money situation once a year, do it now.

At least in the short term, an annual check-in on your financial health will help you make sure you are on a path to financial freedom — and ideally, it will lead to more splurges like vacations, piano lessons and summer camp for the kids.

How do you get to financial freedom, you ask? Check your progress on the following points this and every year.

Make sure you can handle a crisis

If you think you might be behind in savings, you probably are, and unexpected tax refunds can be great for people who haven’t been able to save throughout the year. The first order of business when it comes to savings security is to make sure you have two funds: an emergency fund for total loss of income and a rainy day fund for those unexpected expenses that are never fun like car repairs, root canals, and new water heaters.

Your emergency fund should hold enough to cover three-six months of expenses. Your rainy day fund should be $1,500 if you rent and $3,000 if you’re a homeowner.

If you don’t have these savings, this is where your tax refund should go, or any unexpected lump sum like a bonus at work. Once you are savings secure and you have no revolving credit card debut, big tax refunds can and should help you with larger goals like a buying a new car.

Think long term

Think about big expenses coming up in the next one-two years like braces, car replacement, new roof, etc. Make sure you save for those expenses as well.

Check your withholding

How do you figure out if its better to have a tax refund or to withhold less? Whether you’re getting a big refund or writing a big check, you should consider your withholding at tax time and decide if you’re disciplined enough to save on your own (if so, withhold less), or if you need the built in safety net of withholding more for that year end lump sum for saving.

Just remember that more money in your pocket each pay period means needing the weekly discipline to not splurge as if you’ve gotten a raise. Or, if you need the extra cash flow for non-discretionary spending like medical bills, school tuition or childcare, withhold less, but make sure you still withhold enough to not have to pay anything on tax day.

Try the IRS’s withholding calculator to know for sure.

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