This article is presented by Kelly Whalen, Consumerism Commentary staff writer.
Should you be one of the millions of Americans (nearly 75%) who receives a tax refund this year, you may be making all sorts of plans for your money. Some people will plan to spend it and some will plan to save it. What’s the best use of your refund?
As a personal finance writer, from now through April I hear from many readers who don’t know what they should do with their tax refund. The average tax refund is over $2,600. That’s quite a few clams!
You have three options, and I’ll offer several ideas on how to use each option.
1. Save your money.
- Emergency Fund: If you don’t have one, using your tax refund to jump-start an emergency fund is an excellent use of your money.
- IRA: If you throw the money you anticipate getting into an IRA you can get an even bigger tax break. Jump-start your retirement savings, and save on taxes as well.
- Long-Term Savings: Are your emergency fund and IRA fully funded? Save it for a nice boost for your car replacement fund, down payment fund, or other savings goal.
2. Spend you money.
- Pay off debt: Many Americans will spend their money on necessities, reducing their consumer debt. This offers the most bang for your buck. If you are debt-free, keep reading.
- Needs: Many people put off larger purchases, whether because they can’t afford it, or the expense is painful. Use your tax refund as a means to purchase something that is needed. Whether it’s a new set of tires for your car, or a new water heater.
- Wants: If you’re a frugal person who has their finances in order it’s likely that you don’t spend a lot on things you want. Now is the time to spring for the vacation you always put off or a new wardrobe to replace your dated work clothes.
3. A combination of spend and save.
Saving and spending portions of your income tax refund is a balanced approach. That way you get to take care of something important or necessary, as well as have some fun with your money.
A word of wisdom: If you are getting a large refund, you should consider changing your withholding on your paycheck. You can print out a W-4 from IRS.gov or pick one up from your Human Resources Department. While many people, including myself, receive refunds due to the sheer number and variety of deductions and credits they have, you may be able to adjust your withholding so that you receive more money in every paycheck.
Rather than wait all year to get a large check you can set up your own refund system by automatically debiting your checking account on each payday to send the “extra” money to a savings account, or specific debt. You still won’t see the money in your account, and at the end of the year will have that much more saved or paid off.
Do you typically get a tax refund? If you will be this year, what do you plan to do with your money? If you need some more ideas, here are ten ways to spend your tax refund for fun.
Updated December 19, 2017 and originally published February 18, 2010.