When it comes to your tax refund, does it pay to be practical, or is it better to play? Our financial planning team weighs in.
The arrival of your annual tax refund can be a real personality test: Should you save it? Spend it? A little of both? Our financial planning team shared how they’ve allocated their tax refunds in the past—and their answers may surprise you.
“I used my first tax refund from working a real job on some modest furniture upgrades” says Ariel Anderson, CFP®. “I had just moved to a new city with my now-fiance, and when we combined our college furniture our new apartment felt cheap and disjointed. It was my first Grownup purchase and I remember being so proud to host friends in our new and improved home. In recent years, I’ve gotten into the habit of setting aside some money for international travel and saving the rest for longer-term goals.”
Rachel Rabinovich, CFP®, also divided up her tax refund in past years. “Most of it would go toward a savings goal, such as building my emergency fund or a home improvement project, or for paying any outstanding debt,” she says. “But I would always treat myself in some way, like going out for a nice dinner or a weekend trip.”
“Three years ago, my wife and I purchased our first home,” says Tyler Dolan, CFP®. “I was able to use my tax refund as part of our down payment. Throughout the next year, we bought a lot of furniture. I never realized how much furniture you need to outfit a home, so we financed a lot of it. We were able to use our tax refund money to pay off the debt before the high interest rates kicked in. Last year, we did something more fun than furniture (for me at least) and used our tax refund to go on a ski trip to Breckenridge, Colorado.”
Think Short- and Long-Term
Need more money on an ongoing basis? Perhaps it makes sense for you to forego the big payout in spring.
“When a client has a tight cash flow, but usually expects a tax refund, I urge them to look at their withholdings. An adjustment could provide them with extra cash in their paychecks,” Rabinovich says.
Alternatively, Rabinovich says some clients prefer to think of their refund as a way to save money towards a goal. “In that case, consider putting the refund into a high-yield savings account or, if appropriate, invest in a Roth IRA. Even a small investment can grow significantly over 40 years until you’re ready to take it out for retirement.”
However you choose to spend your refund, our financial planners agree that you should simultaneously consider your goals and what makes you happy.
“I encourage Grownups to visualize their priorities,” says Dolan. “Write them down and rank them. Many people automatically think they have to use their refund to pay off debt. But what if that’s not at the top of your list? Maybe it would make you more comfortable to build an emergency fund just in case, or maybe a trip to go snowboarding is atop your ranking. It’s OK to only pay the minimum payments on your debts and go after something that’s more important to you.”
“Mentally parcel out your refund between your savings goals, debts, and (of course) fun. You work hard all year—it’s OK to reward yourself as long as it doesn’t disrupt your other priorities,” says Anderson.
Still undecided on how to spend that refund? Take our online class, You’re a Grownup (Don’t Panic!) and start plotting your goals.
Any third-party resources or websites referenced above are not under Society of Grownups control. Society of Grownups cannot guarantee and are not responsible for the accuracy of the resources, websites, or any products or services available through such resources or websites.
While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.