Knowledge and Insights

Don’t Let Your Tax Refund Burn a Hole in Your Pocket

Tax Refund Meeting

April 15th has passed and many of us are awaiting, or recently received, a tax refund.  The average U.S. taxpayer refund over the last two years has approximated $3,100.  If you got/get a nice refund, what do you plan to do with it?

It is very tempting to spend it; to treat yourself or your family; buy that new furniture; take a special vacation; or just burn through it with small impulse purchases until it’s gone.  Is that the best use of this forced-savings nest egg?

If you are carrying credit card debt (the average American household has $7,100 of credit card debt), consider using your refund to pay it off.  If you are behind on your bills – pay them off.  Use the refund to clear the slate.

Do you have at least 6 months’ worth of emergency savings in the bank?  If not, consider using your refund to start or improve your emergency rainy day fund.  In the last economic downturn, those families that had a contingency fund were much better off.

Use the refund to supplement your retirement savings by making an IRA contribution or add it to a college savings account or 529 plan.  Both are good investments for the future, and any growth or earnings will be tax deferred.

If you must spend it, do so wisely on a home improvement that enhances the value of your residence or apply it towards the purchase of a vehicle.  The important thing is not to spend it in a way that ends up putting you further into debt.

Finally – think about your withholding levels.  If you regularly receive a large tax refund check, consider adjusting your withholding.  Big refunds generally mean you are withholding too much from your paycheck and providing the government with an interest free loan that you cannot readily access if you need it.  Rather than tying up that money all year, adjust your withholdings.  Take that extra net pay and direct it to a savings account now.  That way, when the unexpected happens, you have access to your money sooner than April 15th.