What Should I do with my Tax Refund?

When people get a tax refund, they tend to average receiving back slightly over $2000 US Dollars (USD). Of course this is an overall average, and some receive more, while others receive quite a bit less. When you are lucky enough to receive money back, there’s always a question of what to do with it. Should you spend it or save it, invest it or splurge?

The first thing you should probably do if you know you’re going to receive a tax refund is to change your withholding status. A lot of people look at the money they receive back as a “savings” plan. Do note that you aren’t getting any interest on those savings when the government owes you money. If you’re worried that you might then withhold too little, drop the extra money you’re now making on your paycheck into a savings account that you don’t touch. It will earn a little interest, and if you do end up owing a bit on taxes, you have money saved to pay for it.

As for what to do with this year’s tax refund, plenty of people have advice on how you should treat this money. If you have healthy savings accounts and no debt, you might want to splurge. Maybe the refund gets you a brand new TV, furniture you’ve always wanted, or a boost to your vacation savings.

On the other hand, if you do have debt, especially on high interest credit cards, a tax refund could repay some or all of that debt, and it will still be saving you money. You could avoid paying interest if you owe a couple thousand USD on a credit card. Another good thing to consider paying off is your car. Even if your tax return doesn’t completely pay your car loan, it can reduce the amount of interest you’ll pay, and give you more equity in your car. Make sure you mark such repayments as paid to the principal, so they are only used to pay for equity in the car.

If you have little in the way of savings, a tax refund can give you the means to start a savings or money market account. This puts your money to work for you, and provides you with backup funds should you need them. Most people, though, want to spend a little of their return, and that is okay too.

One suggested plan is to commit half of your tax refund to savings and half to special purchases, as long as you don’t have outstanding debts that really need to be paid. Even half of $2000 USD gives you a considerable amount to spend on something fun, something special, or something meaningful. Meanwhile, you’re also adding to savings, money market, or investment accounts, which will benefit you in the future.

While numerous suggestions exist, most important is understanding that a tax refund tends to mean you are not taking enough deductions. Unless your work circumstances change and you’re now in a higher tax bracket, taking a few more deductions can give you access to that money immediately. Then it’s up to you to use your willpower and place that extra amount in savings so it does “work for you.”