About 70% of taxpayers receive sizable refunds from the Internal Revenue Service. Just how sizable? The average refund totals about $2,800.1
What do households do with that money? It varies. Last year, consumer financial services company Bankrate asked Americans about their plans for their federal tax refunds. Thirty-one percent of the respondents to Bankrate’s survey said that they would save or invest those dollars, and 28% indicated they would attack their debts with the money. Another 27% said they would buy food with that cash or use it to pay utility bills. Just 6% said they would earmark their refunds for shopping sprees or vacations.2
So, according to those survey results, about six in ten people who get a refund will use it to try and improve their personal finances. You could follow their example. Here are six possible uses for your tax refund:
- Start an emergency fund or add to the one you have. If you have no such fund at all, your refund gives you an opportunity to start one. Maybe you already have an emergency fund, but it is inadequate for your current stage of life. Your tax refund could be used to fill in the gap.
- Use your refund on your worst debts. High-interest debts, in particular – if you pay off a debt that carries 16% interest, getting rid of that liability is, effectively, like getting a 16% return. If you lack an emergency fund, you should create that first, then think about reducing your debt. Paying debt down without an emergency fund or some reservoir of savings just sets you up for quickly accumulating more debt.
- If you own a home, consider making a thirteenth mortgage payment before 2017 ends. Putting your refund to work that way may make more sense financially than putting it in the bank, given the minimal interest rates on so many deposit accounts today.
- Pay insurance premiums. An IRS refund of around $3,000 could go a long way. If you have put off buying a life insurance policy, your refund might make insuring yourself easier.
- Start investing or add to your investments. You could increase (or max out) your annual retirement plan contribution with it or simply direct it into another type of investment account. Whether the savings or investment vehicle is tax-advantaged or not, you have a chance to make that lump sum grow with time.
- Invest in yourself. Maybe you might use it to start a business or support a business you already own. It could also be spent on education. Think of these options as “indirect investments” that might help you or your household grow wealthier one day.
Lastly, remember what a federal or state tax refund represents. It is a percentage of your earnings that the government holds back, in the event that you owe it in taxes. If you repeatedly get a refund, you might want to carefully adjust your W-4 withholding, so that your paychecks are larger during the year.3
1 – azcentral.com/story/money/business/consumers/2017/01/21/tax-season-6-things-to-know/96776554/ [1/21/17]
2 – thestreet.com/story/13523031/2/why-you-should-invest-your-tax-refund-instead-of-spending-it.html [4/8/16]
3 – turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Forms/Top-5-Reasons-to-Adjust-Your-W-4-Withholding/INF14437.html [2/9/17]