Many of us will be getting a tax refund soon. Oh, what happy days. If we are not careful, it all could be gone in a month or 2 or less. Such as purchasing new video games, going out to eat, buying a new (…), etc. It is good to have a plan. But where to spend the money? So many things we could buy. Here are some suggestions we have. We will assume $1,200 refund for the 2016 tax refund example.
This article was updated with the What to do with our 2017 Tax Refund?
2016 Tax Refund Options
Payoff Credit Cards: With the $1,200 refund, we could pay down some credit card debt. If we are paying a 16% interest rate, that will save us over $0.50 every day in interest. I would much rather have that $0.50 than give it to a credit card company. And that $0.50 a day will be about a $190 a year pay raise.
Emergency Fund: This is a great time to add to an emergency fund. We do not have to use all of it. What about $100 or $200.
Pay Down Debt: What if the amount could pay off a car or some other personnel loan. Even though your refund is gone, you have reduced your monthly bills by a couple hundred dollars a month. That monthly savings could be used for more savings or fun or both.
Something Fun: At the end of the day, your tax refund is money saved by you. It took you 1 year to save that money. While you probably should not spend all of it on something fun, spending some of it could be ok.
Invest It: Whoever guesses that a site about investing in dividend stocks recommends you invest it; you get 10 points. And remember, “the points don’t matter” (Whose Line Is It Anyway). Picking a stock like AT&T (T) will give us a payment of about $60 per year. A nice little jump up in our goal to becoming financially independent.
Charity: This can be a good time to donate to a cause you believe in.
Buy Something You Need: If you know your car needs fixed, this can be a good time to do it. You can make the repairs without going into more credit card debt or using your emergency fund.
Give it Back: You can always give the money back to the government. One way we can do that is spend our entire refund on lottery tickets. Probably not a smart thing to do, but we can do that. And maybe we will become rich, although the odds are not in our favor.
Should I get a Tax Refund: One argument that comes up is should we give the government an interest free loan. Putting it in a savings account at a 0.5% interest rate is basically giving a bank an interest free loan is no different. One benefit or risk of a bank account is that the money is easy to spend. Having some money that is hard to spend can be a good thing with how hard it is to save money. And I tend to use the refund to fix my balance sheet and buy something I need, like a new refrigerator.
Therefore, this could be a good time to review your tax withholding. If you are getting too much money back, you may want to reduce it. Or you could leave it alone or increase it. It is hard to save money, and if this helps you save money, use it your advantage. There is also the argument that you could have been putting the money into a 401k account. While that is true, I do not plan on using my 401k account to buy a new couch. However, reducing your tax refund and investing it can be a good thing.
What are you Deciding?
As with the many items in this post, this will be a highly-personalized choice. But knowing your choices will help you make a better one.
We are using our refund to pay down debt and invest. Use the comment section below to share what you will do with your 2016 Tax Refund.