How Should You Use Your Tax Refund?

June 26, 2015 | By: Matt Robinson

what to do with your tax refundThe main tax season has come to an end, and many consumers are waiting for their tax refunds. The average tax refund this year (with data through April 17) indicates that the average tax refund was $2,711. That’s not a bad chunk of change.

Before you spend the money, though, it’s a good idea to take a step back and consider your options. What do you want to do with that money? What would be the best use for it?

Tax Refunds as “Found” Money

One of the reasons that so many of us get excited about tax refunds is because the money feels as though it is “found.” Even though this money is, for the most part, the government returning what has been overpaid, it feels like a windfall, and many citizens treat it as such.

While it might be more practical to have less withheld from a paycheck in order to avoid giving an interest-free loan to the government, most people still prefer to receive the chunk all at once, after the pain of going through the paperwork to file their taxes.

Ideas for Using Your Tax Refund

While it might be fun to spend your tax refund all in one place, it’s a good idea to think about your goals and priorities. Too often, with what we consider a windfall, we spend it without considering where it might be put to best use. Some of the most practical ideas for spending your tax refund include:

  • Pay down bills: If you have high-interest credit card balances or other high-interest liabilities, your tax refund can take a big bite out of that. Use your tax refund to pay it down, and you’ll reap the benefits in terms of interest savings and the peace of mind that comes with knowing that you owe a little bit less.
  • Invest: Another option is to invest the money. You can use the money to boost your retirement account or add a little extra to your child’s 529 accounts. This is a good way to help your money grow over time.
  • Start an emergency fund: If you don’t have an emergency fund yet, your tax refund money can be the perfect way to get that started. Make it a point to get ready for a rainy day, using your tax refund as a seed.
  • Buy something you need: In some cases, you might find that you are on the verge of the need to buy something. Perhaps your car is on its last legs or you need a new major appliance. Maybe you’ve been meaning to replace your old flooring. Carefully weigh your options, and determine if your tax refund could help you replace something that you require.

Of course, there’s nothing wrong with splitting your tax refund a couple of ways if you have a large enough amount of money. You could put some of it toward something practical, and the rest toward a vacation or a frivolous purchase. The important thing, though, is that you carefully consider your situation and your options and that you also reconsider your withholdings. Consider what you could do with the money year-round, rather than just using it once a year at tax time.