The average tax refund in 2012 was $2804, with three out of four taxpayers getting money back. The IRS delivered 109.3 million refunds last year, adding up to a total of $318.5 billion. If you’re like me, you’ve probably already mentally spent your refund on red bulls, twinkies, and a collection of bobble heads of D-List celebrities (I just need Snookie and I’ll have a complete set). Ok, let’s hope you’re not like me and you’re going to use your refund as prudently as possible. Most consumers see their tax refunds as unplanned bonuses; 1 in 3 will spend their refund within the first 3 months of receiving it. 29.7% use it for “everyday expenses”, 11.9% take a vacation on it, 13.2% will make a major purchase, and a surprising 1.3% use it to file for bankruptcy. Here are a few things to remember to avoid falling into that refund trap:
It’s not a bonus.
It’s tempting and fun to look at a refund as “free money” instead of what it actually is – a return of your own money from the government. The trick is to view a tax refund as you would your own paycheck. In that light, you wouldn’t take your paycheck and blow it on a trip to Cancun, or spend it all on eBay on a rainy afternoon. Figure your refund check into your budget as soon as you get it.
Pay down debt.
Using your refund to pay off debt (especially high interest debt) is wise. Not only are you paying off a nice chunk of debt, you are canceling out a share of interest that will beat what you would get from leaving the money in the bank.
Save it for a rainy day.
Why not give yourself an even bigger return on your tax refund by putting the money into a savings account–or an emergency savings account, CD or retirement fund? Plus, it’s always helpful to have a savings account to draw from when a major car repair bill, medical emergency or other unexpected expense comes along.
Give it away!
This is, by a long shot, the best and most satisfying option. The others make worldly sense, but this one makes spiritual sense. $1000 refund could do so much good. $60 will send a child to school for an entire year in Benin. $20 can give someone in a developing country clean water. $1 can buy 8 meals for someone starving in America. The opportunities for joyful giving are endless. Check out Charity Navigator to find a worthy recipient. How do you plan to spend your refund?