Bobservations: What To Do With Your Tax Refund

This year is a milestone in the Santy home because for the first time in 25 years, Diane and I will not have dependents to claim on our taxes. While I could easily bemoan this personal loss, instead I choose to celebrate the rite of passage for my youngest daughter, Mattie, and help her file her taxes. Like most young people just starting their career, she will get a refund. I must say, it was a bit more stressful for her to watch than I thought it would be, but as soon as we completed the process, she had three questions: How much is it? When do I get it? What do I get to do with it? That got me thinking … what are the most strategic ways to use a tax refund.

Pay Off (or Pay Down) Debt

If you’ve read any of my posts, you cannot be surprised that this is on the top of my list. Debt is a huge issue in this country. Per a recently published report by Ascent, in 2020, the average American household has $215,655 in mortgage debt, $6,271 in revolving credit, $49,929 in equity lines of credit, and of course, there are student loans, parent loans, car loans, etc. Having this kind of debt, especially in such an uncertain job market, must feel overwhelming. That is why it is so important to get out of debt and stay out of debt. Using your tax refund to pay off or pay down debt is one way to make progress. Just look at this example: According to a Nerd Wallet report, paying off $2,200 in credit card debt could save you $3,585 in interest compared to just making the minimum payments.

Build an Emergency Fund

Once you are out of debt, it is a good time to make sure you have a fully-funded emergency fund to cover three to six months’ worth of expenses. In the last year, many of us experienced financial emergencies. If you haven’t gone through one yet, be thankful because the odds are it will happen. That’s why we need to be prepared, it’s the prudent thing to do. In Proverbs 13:16, the author tells us that, “Every prudent man acts with knowledge, but a fool flaunts his folly.” You could easily put your tax refund into a savings account earmarked as your emergency fund and check this off your list.

Be Generous

Have you ever noticed that the people who hoard only want more? We have either seen people like this, know people like this and at times we are people like this. Proverbs 11:24 tells us that, “One person gives freely, yet gains even more; another withholds unduly, but comes to poverty.” Let’s break the ugly cycle of hoarding and wanting more. Let’s be different. Let’s be known for our generosity. Does the thought of donating a portion of your tax refund to your favorite charity get you excited or bring you down?

Invest (Retirement)

Regardless of your age, you should be planning for your retirement. According to a recent post by Dave Ramsey, an initial investment of $2,500 followed up with $200 monthly contributions for 30 years could yield up to $789,000! That sounds like a pretty good use of your tax refund to me.

Do Something for You

While it may be last on the list, it is on the list. After considering all of the options above, what is one thing you need or want that you just haven’t been able to get? Using your refund to finally reward yourself after a prolonged period of delayed gratification can be a great use of your refund and it prevents you from going into (or further into) debt.

Having a good financial strategy doesn’t mean you’ll never get what you want, it simply means that you stay out of debt by living under your means, fund emergencies, plan for retirement, and be generous.

Pop Quiz now that you made it to the end of the post. Do you know what you can do with your tax refund once you have items 1-4 covered? Anything you want!