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How to “Spend” Your Tax Refund

Tax season is upon us, along with the requisite anxiety that comes with having to file your taxes. Will I end up owing taxes this year? Or will I get a nice juicy tax refund?

I don’t profess to be any kind of finance guru. I’m your typical law school graduate who has been practicing for several years now (3.5, to be exact). I was never interested in personal finance until I found myself caught up in the high cost of living in New York City while burdened with law school debt. These days, I’m much more knowledgeable about what to do with my money and happy to say that I’m in a good place despite not earning a Big Law salary.

There are a few weeks left to file your taxes. If you’re one of the lucky ones who will be receiving a tax refund, congratulations and take a moment to fantasize about what you want to do with the refund money. Then come back to reality so I can tell you what to really do with that extra cash.

The classic personal finance mistake is rooted in basic desires. It’s not about something technical like whether you invested in the right index funds after analyzing X Y Z. When we have money, we want to spend it. The rationality that we regularly draw upon in our practice of the law gets trumped by the irrationality of satisfying the urge to buy things that we wouldn’t feel comfortable buying without a windfall. For example, the old me would have eagerly used my tax refund to splurge on a pair of designer shoes or maybe a coveted bag from my list of shopping wants. Now I’m much more boring after having experienced the tribulations of law school, the shrinking job market, and loads of debt from attending said law school. I can’t afford to whittle away a significant lump sum on shopping anymore.

So if you want to be responsible and grown-up, sock away your tax refund into one of the following possibilities.

Law School Loans
Even if your refund is only a few hundred dollars, use it to pay down the balance of your highest interest loan. The faster you can reduce the principal, the less monthly interest that accrues on your loan.

Emergency Fund
If you have $0 in your emergency fund, then I would say building your emergency fund trumps payment of your loans. At the bare minimum, you want at least $1,000 in there, which would help cover costs for unexpected incidents like a root canal or car repair. Otherwise, you would be forced to turn to credit card or other means and pay with money that you don’t actually have in the present. Life is always throwing curveballs so be prepared.

Savings / Retirement
Put the money away for a rainy day and let it grow for the future. Enough said.

Short-Term Savings Goals
At the same time that having a fat savings account is good, you want to have goals as to how to spend the savings to meet your needs. For instance, saving for a down payment on a house or saving for your upcoming wedding are valid short-term goals.

So I’m expecting something after deductions for my student loan interest and traditional IRA contribution. What will I be doing with my tax refund? Putting the refund towards one of my federal Stafford loans with a 6.55% interest rate. Cheers to being one step closer to freedom.

Sunny Choi is the 2013 Writers in Residence Coordinator for Ms. JD. She is a former participant in the Writers in Residence program, where her monthly column Legally Thrifty focused on beginners personal finance advice for law students and professionals. A graduate of the University of Michigan Law School, she currently practices commercial litigation and creditors’ rights while freelance writing and blogging in her spare time. She can be reached at

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