Your tax refund check just arrived. What should you do with it?
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Your refund check has arrived. You’ve already spent it, or saved it, several times over, but only in your head. Now, you must decide what to actually do with the money.
An income tax refund isn’t like a regular paycheck. It’s a one-time windfall. For many of us, it’s the biggest paycheck of the year.
The average refund check issued by the IRS so far this year is $3,182, as of March 1.
As welcome as the cash may be, a refund isn’t necessarily a good thing.
“It means you withheld more taxes than you owed throughout the year, effectively giving the IRS an interest-free loan,” said Randy Bruns, a certified financial planner in Naperville, Illinois.
Yet, “from an emotional standpoint, nearly everyone loves a tax refund,” Bruns concedes.
Inflation is up. Credit card debt is surging. If you are in a position to choose how to spend your refund, count yourself lucky.
“For most Americans, that refund is spent before they receive it,” said Jeff Jones, CEO of H&R Block. “They know they have bills to pay, and that’s the priority.”
Save your refund check? How? Or spend it? On what?
If you don’t have urgent bills to pay, then you must decide the fate of your refund check: Save it? How? Spend it? On what? Or a little of both?
On the save-or-spend question, some financial experts focus on the appealing logic of comparing interest rates.
Let’s say you have credit card debt with a sky-high interest rate of 20% or more. You also have a high-yield savings account with an enviable interest rate of 5%.
One of those rates is undeniably higher. To some experts, it’s a no-brainer: Spend your refund paying down the high-interest debt. The savings account comes second.
“Arguably, the first two priorities for additional funds should be paying off high-interest debt, such as credit card balances or personal loans, which can save you money on interest payments in the long run, and establishing an emergency fund to cover unexpected expenses like medical bills or car repairs,” said Laura Mattia, a certified financial planner in Sarasota, Florida.
If paying off high-interest debt is your top priority, you’d still be wise to save at least some of the money, said Liz Windisch, a certified financial planner in Denver.
“There are very few people who have an appropriate amount of emergency savings and are maxing out their retirement savings,” she said. “Always try to save some of the refund.”
Some experts say we should prioritize saving our refund over spending it.
“Invest it, in yourself or the markets,” said Catherine Valega, a certified financial planner in Boston. “Don’t spend it.”