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What to Do with Your Tax Refund

by on April 6, 2012

By Meghan Stewart

One you have finished filing and submitting your taxes all that is left to do is to decide what would be the best way to invest, save or spend that money once it arrives in the mail.  If you are serious about taking power over your life and finances, you should be looking for advice that will help you spend use your refund cash in the most effective way that will improve your finances, right?

Following the start of the Great Recession in 2008, the majority of Americans started putting their refund checks toward paying off debt. Last year, however, studies showed a major shift with more Americans choosing to put their refund checks directly into savings. The National Retail Federation reports 43.8% of Americans are planning to use all or part of their refund check to contribute to a savings or a retirement plan this year.

Only 39.4% are planning to use all or part of their refund to pay down debt. These two spending expectations have changed places over the past few years, when in 2008 and 2009 most refund checks were being used to reduce debt (46.5% and 48% respectively in each year). While the trend of paying off debt with refund checks has been decreasing since 2009, building savings has been increasing.

As we saw in past years, more than 1 in 4 Americans plan to use their refund check to cover everyday expenses. Only about 12% are planning to splurge on a big-ticket purchase like a new TV, car, or living room set, while roughly 11% will put the money to a vacation. The IRS estimates the average refund this year will be approximately $3,070.

So what’s really the best thing to do with your refund check? In truth, anything beyond building savings or paying off debt is basically blowing your money. Even if you’re using your refund to pay everyday expenses, this is really just throwing your refund money away just like you would if you buy a TV or vacation—you’re just spreading out the expenses, instead of spending it all in one place.

If you need to improve your monthly personal finances, don’t use your refund to pay off everyday expenses. Eventually your refund money will run out and you’ll still be facing the same financial hardship you put off using your refund. Instead, consider using your refund to pay off credit card debt. By reducing the amount of debt you owe, your monthly credit card debt payments will be reduced or eliminated allowing your budget and month finances to improve leaving you with more money left for everyday expenses.

The same is true for spending your refund on a major splurge like a vacation. If you simply use your refund to pay off debt, you can free up more money in your budget to make room for major expenses. Within a few months, you can make room in your monthly budget and save up to pay for these bigger expenses within your normal monthly budget.

Men versus Women: Who uses their refund check more effectively?

As a final fun comparison, there are some small differences between how men spend refunds versus women. Women are more likely to use their refunds to pay off debt, as well as spend the money on everyday expenses. On the other hand, men are a little more likely to save some of their refund and more likely to splurge on a major purchase. Both genders are equally prone to using a refund to take a vacation.

  • Pay off debt: Men = 37.8%, Women = 41%
  • Saving: Men = 45%, Women = 42.6%
  • Everyday expenses: Men = 27.4%, Women = 29.9%
  • Major purchases: Men = 12.6%, Women = 11.9%
  • Vacation: Men = 11.3%, Women = 11.4%
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