Suze Orman’s 3-Step Tax Refund Challenge — Can You Do It?

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It’s that time of the year where you may finally see some extra funds hit your bank account due to a tax refund. The IRS reports that the average tax refund so far in 2024 is $3,050, but the amount that you may receive depends on various factors.
For the sake of this article, let’s assume that you’ve already found out that you’re getting a nice tax refund this year. Here we will examine the different ways you can spend it based on advice from financial experts — most notably, Suze Orman.
Orman’s Tax Refund Challenge
Here’s the three-step tax refund challenge from Suze Orman, one of our Top 100 Money Experts.
Step 1: Pay Down Your Credit Card Debt
If you have any credit card debt, you should focus on eliminating it since interest rates are higher than usual at this time due to hikes from the Fed to combat inflation. Your main priority should be to pay down your expensive debt so that you can keep more of your money in the future.
The main priority for a tax refund should be to tackle any debt that’s hurting you every month. The biggest issue with debt is that you have to allocate a portion of your earnings to pay off your money instead of investing in the future. You also want to tackle any student loan debt or any other debt that you have.
As tempting as it will be to treat yourself first with that tax refund, you should try to embrace delayed gratification by working on your debt so that next year when the funds reach your bank account, you can enjoy the money. Sometimes personal finance involves sacrificing short-term pleasure for long-term rewards.
Step 2: Find Something To Focus On
In her blog post, Orman shared, “Take a few minutes and ask yourself what would make you feel better about your finances.” Orman wants you to find one or two areas to focus on that would help you with your money. What you decide to focus on will depend on your situation and where you want to be in the next year or so.
For example, you may find that you need to invest in your education so that you can upgrade your skills to increase your income. You may also discover that you haven’t been investing in your self-improvement as much as you should be.
The goal is to find the best use for this tax refund. You want to be proud of the moves that you make when looking back a few months down the road.
Step 3: Beef Up Your Savings If You Can’t Think of Anything
“In terms of building more security for the here and now, there is no smarter option than working on your emergency savings account if you’ve yet to accumulate up to a year’s worth of living expenses,” said Orman.
As we’ve all seen in the last few years, you never know when life can throw an unexpected expense at you. This is why adding to your emergency fund is so important.
Orman is also a proponent of increasing your savings by either using a Roth IRA if you meet the income limits or adding to your workplace 401(k). By contributing toward your retirement accounts, you help out your future self so that you don’t have to stress about covering expenses in your golden years.
More Financial Experts Advise What To Do With Your Tax Refund
What have other financial experts shared regarding handling your tax refund? Let’s take a look.
Create a Plan
Ramit Sethi shared his framework for unexpected income, such as tax refunds, and here is his breakdown for spending the money:
- 75% goes toward investments
- 10% toward savings that will be spent within the year, like a vacation or some other treat
- 10% goes to lifestyle improvement
- 5% to long-term and retirement savings
The key here is to put 10% toward treating yourself so that you have something to look forward to. Personal finance shouldn’t always be about saving every penny, as you want to ensure that you stay motivated and focused on your journey. That small reward could be what you need to stay determined on your financial journey.
Invest in Your Retirement
Dave Ramsey wants you to focus on paying down your debt and building up your emergency fund. Once you have 3-6 months of living expenses in a fully funded emergency fund and no debt, you should consider using any extra money toward retirement planning.
Closing Thoughts
Personal finance is personal because we all have different financial situations. The general consensus from most financial experts, however, is that a tax refund is an excellent opportunity to reduce debt that could be holding you back.
Orman’s tax refund challenge should be a starting point if you’re unsure of how to spend your money when it hits your bank account.