The average tax refund in America is about $3,000. And even though it’s technically already your money—you overpaid, and now the IRS is setting the balance right—it’s hard not to see that $3,000 check as a windfall.
Windfalls have a funny effect on our brains. They’re like a sudden gift from the heavens that can disrupt your normal decision-making routine.
So, if you work a regular nine to five, you’re probably wondering whether you should spend that tax refund on something responsible or something fun. Think brake job for your car vs. new stereo system. Gym classes vs. wine tour.
Own your business, and that crisis of conscience gets even tougher. After all, it’s not just you that you have to think about—it’s your livelihood. You know you should reinvest your tax refund. But then your inner twelve-year-old starts screaming out for a backyard skate ramp.
What you don’t need
Google “how to spend tax refund,” and it seems like every magazine, blog, and business celebrity is offering the same bite-sized pieces of one-size-fits-all advice:
“Pay down your business credit card.” A wise, if boring, choice.
“Invest in marketing.” But how?
“Hire more staff.” If your tax refund is the equivalent of an annual salary, then great (well actually, not great, because you overpaid your taxes by a frightening amount!).
And on and on. This is all decent business advice, but there’s one problem—it’s not designed to suit you or your business. That’s a problem, because your business only has one feature in common with every other one out there: It’s unique.
For instance, even if you compare your tattoo shop with the one across town, you’ll see you have different customers, different professional goals, and vastly divergent opinions about which brand of black ink is the blackest.
So one-size-fits-all advice like “Hire a consultant” or “Save it for a rainy day” isn’t going to be much help. What’s hardest is actually putting the money to work for your business, rather than spending it somewhere else. For that, you need willpower—and marshmallows.
Life is like a marshmallow
In 1970, psychologists at Stanford carried out the marshmallow experiment. Their goal was to see how the ability to delay gratification developed in children.
A researcher presented the subject with a fluffy, soft, slightly-dusted-with-sugar marshmallow. They told the child that, if they could hold off from eating the single marshmallow now, they’d get two later on.
Bottom line: Some kids were better at delaying gratification than others. Years later, the kids who patiently waited for marshmallow number two were more successful overall.
Take the tattoo shop example. You could buy a shiny new tattoo machine—a joy to use, even if it’s no less painful for your clients. Or you could invest in more signage out front, and some advertising on Instagram.
The first option would give you a marshmallow—the fluffy, delicious sensation of a new purchase. The other would give you two marshmallows, in time—more clientele, more income, and the chance to grow your business. In exchange, though, you have to keep using the same old machine. Gratification delayed.
There’s a third option, though. What if you split the marshmallow? Spend part of it on immediate gratification, part on an investment for the future. Take a nibble of your tax refund to subdue your hunger, and save the rest.
Managing gratification is the first ingredient in our tax refund spending system. The second is a graph: The Want-Should Axis.
The Want-Should Axis
So you’ve decided to split up your marshmallow between immediate gratification, and investment for the future. But figuring out which is which is not so simple.
For example, the new tattoo machine. Sure, the one you have now is perfectly functional. But wouldn’t a shiny new one have more useful life left on it? Plus it might impress clients—make you seem like more of a hot shot tattoo artist, someone they should refer their friends to. And since the new machine would make you happy, and when you’re happier you’re more productive, you’d come up with more tattoo designs, and….
This line of reasoning can quickly transform a treat into a responsible, adult decision. That’s why you need to take a good, hard look at any business investment, and decide whether it’s something you want to do, or something you should do—or somewhere in between. The best way to do that is by placing it visually on an axis.
Want vs. Should
You can think of the purest “want” as something that you desire, but has very little redeeming value for your business. Like buying a slurpee machine. It might make your shop more memorable to visitors, but compared to the cost of upkeep and cleaning, the value isn’t there.
The purest “should,” on the other hand, is something your business definitely needs—but gives you little personal satisfaction. Like installing double pane windows in your tattoo shop, in order to lower your heating bill.
Yes, there’s a certain satisfaction from knowing that you’re reducing your expenses a little each month. But you’re not getting all those savings all at once—it’ll take time to make a difference. And the new windows look just like the old ones.
On rare occasions, want and should sync up: Something you really enjoy spending money on is also good for your business. For instance, a tattoo shop in Paris invites you to visit as a guest artist. See the Montparnasse Cemetery! And recoup your costs with a stream of new clients!
It seems almost too simple. But thinking carefully about where each expense goes on the axis, and then using a visual representation, makes it less abstract and more concrete. It also leads you away from the kind of emotionally-driven reasoning that leads to bad decisions (“But the skate ramp behind my house is an investment in the property!”).
Putting it into practice at the tattoo shop
Here’s an example of the axis in action, using our example of the tattoo shop.
Let’s say your refund is exactly $3,000 (the national average). And you’re going to invest all of it in your business.
First, consider all the fun stuff you’d like to buy for the shop.
Like a high quality taxidermy jackalope($600). It’s a bit pricey for an animal that almost certainly doesn’t exist, but it would suit the decor of the tattoo shop.
Then there’s that slurpee machine ($2,900). Even more expensive, but in the summer it would be “so worth it”.
You also want an extra lamp for your workbench ($200), so you can see better when you’re tattooing. Sort of practical, but still a nice-to-have.
Finally, you’d like some new artwork to hang on the walls ($1,100)—just to keep things fresh.
Once you place your wants on the graph, you get something like this:
Now, it’s time to list your shoulds:
- Double-paned windows ($2,200), to reduce your heating bill.
- Business credit card debt ($1,700) you could pay off.
- A new workbench ($400). One of the legs on your old one is cracking, and probably won’t last through the year.
Put all your shoulds on an axis, and they look like this:
Finally, we combine your wants and shoulds, and get a complete graph of your spending options:
This is just an example—your personal graph could look different.
Most of your refund gets spent on something boring but overhead-reducing (double-paned windows). But you also get a cool, impractical $600 treat (the stuffed jackalope). And then there’s a nice in-between expense—a $200 lamp that will help you do your job better, while making work easier. Of course, if your business is on fire and might not survive the next few months, your entire refund will go to survival mode. But if imminent death isn’t in your foreseeable future, the want-should axis can help.
By budgeting out your tax refund like this, you can make the most of your windfall—enjoying some of it, while still making a solid investment in your business. You don’t have to lose sleep over how you’re spending your money. And you’ve got a new way to visualize business spending—not just during refund season, but year round.
Some bite-sized pieces of advice
Remember early in this article, when we said a lot of the bite-sized advice out there isn’t helpful, because every business is different?
That’s still true. But, to backtrack a bit, there are a few tax refund spending tips that benefit virtually every small business. So, if you’re having trouble filling up your “should” graph, consider one of the following:
Save for retirement. This is about as delayed as delayed gratification can get. But 39% of small business owners are worried they’ll never be able to retire. If that sounds like you, putting some cash away in a retirement account can save you trouble later on—and help you rest easy at night now.
Pay off debt. The average American small business carries $195,000 of debt. And half of small businesses fail in the first five years—largely because of debt mismanagement. Whether it’s paying down your credit card, or chipping away at the principal on your small business loan, paying off debt is always a smart move.
Upgrade your accounting. For many business owners, “hiring an accountant” consists of walking into a national accounting firm every tax season and paying for the one-size-fits all tax filing package. Having an accountant who knows your industry, understands your business, and works for you year-round can save you a lot of money in taxes. An investment well worth considering—get started with our guide on how to hire an accountant.
Hire a bookkeeper. When you have a qualified bookkeeper working for you, you get everything you need to track your financials, make smart business decisions, and file your taxes on time. Plus, it saves you time and stress—so consider hiring a bookkeeper both a “want” and a “should.”