Updated on 03.16.15

Don’t Waste Your Tax Refund: Four Better Ways to Use It

It may feel like a windfall, but it is -- and always was -- your money. Spend it wisely.

couple on the beach

Your tax refund could pay for a one-week vacation now… or an early start to the permanent vacation of retirement.

According to the IRS, the average tax refund so far this year has reached a staggering $3,539. It’s still early, however. And as the tax agency notes, most of the big refunds are filed quickly since the people receiving them don’t want to wait for their payday.

Still, last year’s refunds for tax year 2013 were averaging around $3,034 by the beginning of March, which is a decent chunk of change for the average American family. It’s hard to say why people allow their refunds to grow so huge, but that’s beside the point. What really matters is, how are they spending them?

The numbers are all over the place. According to the National Retail Federation’s Tax Returns Survey conducted by Prosper Insights & Analytics in 2014, 46% of those expecting a refund planned to put it into savings last year. Meanwhile, 37.7% planned to use their refund to pay down debt. That’s good, right?

Unfortunately, not everyone has the same noble goals when it comes to how they plan to spend their refund. According to last year’s survey, 25% plan to use it to pay for everyday expenses, more than 10% planned to use it for a major purchase, and another 12.8% planned to use it for a much-needed vacation.

Still, since the average middle-class adult has only $20,000 in retirement savings and the average American family carries $15,950 in credit card debt, it might be wise for more of us to look at our tax refunds as an opportunity to get ahead — instead of an opportunity to splurge. With that goal in mind, here are a few ways you can utilize your tax refund to do just that:

Pay Down Debt … Once and for All

If you really want your tax refund to last, follow the lead of the 37% who plopped their refund down on their least desirable debts last year. It doesn’t matter whether it’s credit card debt, a lingering student loan, or some other kind of debt that has been hanging over your head. Use your refund to kill it, and don’t look back.

If you are having trouble picking which debt (or debts) to kill, start by considering either your smallest balance or your highest-interest loan. With the latter strategy, you’ll save money on interest payments. But with the former, you may gain a psychological advantage by getting rid of a few choice debts right away and for good. Either way, you’ll be much better off than if you used your refund to, say, buy a new flat-screen TV.

Add to Your Permanent Vacation Fund

Taking a sweet vacation to Cancun sounds like an awesome plan for your tax refund. But you know what’s better? Taking a permanent vacation around 55 — also known as an early retirement — because you have the funds to walk away from your day job for good. If you’re still young, there is no better time than the present to bump up your retirement savings.

As long as your income falls below $114,000 if you’re single (or $181,000 for a couple), you can contribute up to $5,500 to a Roth IRA for 2015. If you are older than 50, you can add up to $6,500. Also consider other investment options you may not be maximizing, such as health savings accounts, college savings accounts, and even work-sponsored retirement accounts.

Pay for a Car in Cash

According to Experian, the average monthly payment for a new car rose to a record-breaking $471 during the fourth quarter of 2013. That’s a huge sum of money to pour down the drain every single month, and it’s also entirely necessary. Fortunately, your tax refund might be enough to save you from the perpetual car loan, but only if you let it.

The average tax refund may not be enough to buy your dream car, but it is probably enough to pay for a reliable older model that may not be too embarrassing. If you could get away with it, you could feasibly have an extra $471 in your pocket next month and every month thereafter. You could then use that money to pay down debt, save for the future, or save toward other financial goals you have.

Save for a Rainy Day

If you’re already headed toward debt-free living and meeting your retirement goals, take your tax refund and put it in a high-interest savings account. Use it as part of your retirement fund, save it for a rainy day, or think for a few months about what to do with it while you decide what is really important. You may not need it today, but you might think of a perfect use for your refund down the line.

If you don’t have an emergency fund, start one. If you have one but it is only partially funded, use your tax refund to beef it up. Eventually your roof will leak, your car will need repairs, or something else will come up. And when that day comes, your money will be ready and waiting.

It’s easy to get caught up in the excitement of getting a tax refund. For some, it can seem like a windfall out of nowhere, but that couldn’t be further than the truth. Your tax refund is, and always was, your money. Use it wisely.

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