The IRS issued 111.9 million refunds totaling $323.87 billion in 2017. The average refund was $2,895. If you are one of the millions of Americans who will get a tax refund this year, you’re faced with a big decision: how to use that money.
If you end up with a little extra money in your bank account after you file your taxes, here are some of the best and worst ways you can spend that dinero:
What to Do With Your Tax Refund:
1. Pay Off Any High-Interest Debt First
It doesn’t sound sexy, but if you can knock out some debt (often credit card debt) that’s costing you money each month, you can take a huge positive step financially. There are different approaches like paying off the highest interest or paying off the biggest amount first (which can sometimes mentally be a big motivator), so look at various options for paying off credit card debt to make it work best for you.
2. Stash Money Away for an Emergency Fund
Only 39% of Americans say they’d be able to cover a $1000 emergency expense with savings, according to a 2018 Bankrate survey. If you’re in the majority who doesn’t have that savings stashed away, it’s a good idea to save money for a rainy day in case you need it. An emergency fund will keep you from having to charge emergency costs on higher interest credit cards or having to get creative to pay for something that pops up.
3. Let Yourself Enjoy a Little Something
You don’t have to stash everything away. If you’re in good shape financially, you can enjoy amazing experiences and keep yourself financially stable. Just maybe best to make sure you cover the basics first.
I recently heard this story from a friend: “Back when I got refunds – before the “marriage penalty”—I went on a last minute trip to Amsterdam with a friend. I received the refund and was discussing with a friend on phone a few days later. He talked me into tagging along. On Tuesday I bought a plane ticket, and the following Saturday boarded the plane. Spent a week in Amsterdam. It was one of the best and craziest decisions I’ve ever made.”
4. Take “Adulting” to the Max
I get excited when I get a new juicer or vacuum, which is something my 20-year old self would laugh at. This seems to be a common scenario for homeowners. The fact is that it can feel good to not let that new roof, exterminator charges, or plumbing fix take the place of a vacation or something fun. If you have something you’ve been meaning to do or you know you need to happen, putting money towards it can help you both financially and mentally.
What Not to Do With Your Tax Refund:
1. Don’t Just Blow It All
Another friend told me about a bartender she worked with who got a big tax refund and then showed up to work late the next day after a night out with friends at a hotel party he threw to celebrate. If you do something like that, not only will you likely have a headache the next morning but you’ll probably have a lot of regrets on how you threw away all that hard earned money.
2. Don’t Spend It All in One Place (or on One Thing)
Maybe you been eyeing a new car, a dream vacation, or want to get in on the wild action in the stock market or cryptocurrencies… There’s nothing wrong with splurging on big-ticket items IF you’ve got little or no credit card debt, and IF you’re already maxing out savings for your retirement (and the kids’ college funds), and IF you’ve already made that extra mortgage payment.
In other words, unless you’re one of the wealthy few, fortunate (and prudent) among us, you’ll be much better off in the long run by putting at least some of your refund toward something sensible vs. putting it all on black (or red). It’s OK to treat yourself and your loved ones to something special with your refund, but remember—all things in moderation.
3. Don’t Count on Getting a Tax Refund Next Year
Whatever you do, don’t count on a tax refund as a sure thing when you budget. There are a variety of factors that go into getting a refund, so if you get a new job, make a major purchase, or make other major life changes, you may or may not get a refund the next year.
Do make sure if you have any changes, you assess your withholdings. Talk to your CPA or a tax advisor for tips to make sure you’re handling things correctly, as a wrong move could end up causing you a big payout when you go to file taxes next year.
If you’re not set to get a tax refund, don’t worry! The fact that you’re not getting money back actually may just mean you’re doing a good job of managing your withholdings and/or quarterly tax payments. Regular budgeting and saving throughout the year is still something you can use to your advantage to maintain a healthy financial life.