Best practices for your tax refund

How Will You Spend Your Tax Refund?

If you’re waiting for a tax refund, chances are you already have some ideas of your own. For the past few years, the average tax refund in the U.S. has been around $3,0001. That’s a sizeable amount for most of us, but before you spend it all in one place (like a dream vacation), you might consider other options that could be better for your finances in the long run. After all, your refund is not free money from the IRS. It’s your money being given back to you.

A recent Edward Jones survey2 found the following about how respondents planned to use their tax refunds this year:

- 52% — Necessary items like groceries or credit card bills

- 30% — Save

- 8% — Something fun

- 8% — Investments

- 2% — Not sure

 

Though we don’t really know what people actually do with their refunds, maybe their stated intentions are a good place to start with suggestions.

 

Reduce Debt and Increase Savings

In order to make an impact in this area, you might consider putting the lion’s share of your refund toward options like these:

 

  • Debt — If you’ve been making minimum payments, a windfall like a tax refund provides a way to quickly reduce at least some of your debt. Reducing high-interest loans or credit card balances will save you money on interest in the long run.
  • Savings — Adding to a savings or money market account is another wise way to leverage your tax refund. This could be an emergency fund, or it could also kick off saving for the holidays, or for a bigger purchase, like a car.
  • Investments — If you are going the savings route, think about contributing some of your refund to a mutual fund or retirement plan to make sure you can’t take it back out easily to spend on something else.

 

Use part of your refund for something you enjoy — or even need.

  • Ideally, you’ve used most of your refund to improve your finances, but you could still pay for a treat for yourself or your family, like a getaway, for example. Also, maybe think about the things that you enjoy every day, like a TV or tablet.

 

  • Alternatively, it could be that what you really need (versus want) is to have some work done around your home or on your car. Or, perhaps you have an appliance that needs to be repaired or replaced. Those aren’t exactly ‘fun’ expenditures, but they could help relieve stress and improve your day-to-day life.

 

  • You could also use the money to improve your wellness. Have you been putting off a gym membership or bike purchase? Need to visit the dentist or get new glasses and haven’t had the cash for even the copay? Using the refund to take care of your health is another great option to consider.

 

Regardless of how you spend it, your refund gives you a chance to take care of some of your financial obligations as well as those things on your wish list.

 

Want a smaller refund instead?

If you received a tax refund, it means you overpaid your taxes in 2013. And, about 75% of individual taxpayers get one every year.3 Many consider this giving the government a free loan — and you have to wait to get your money back. So, if you prefer to have more of your salary now and less of a refund later, you can balance your withholding exemptions to pay just enough taxes throughout the year.

 

 

1 Internal Revenue Service

2 http://www.cnbc.com/id/101453425

3 http://online.wsj.com/news/articles/SB10001424052702303772904577334051286775814

 

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