How to spend your tax refund

So tax time has come and gone … well… I hope that everyone has filed their taxes! In any case, for some people who are receiving tax refunds, I started to wonder about how to spend/save these funds. According to the IRS, the average 2019 refund for Americans is $3,000 and according  the Revenue Canada, the average refund is $1,635.

Everyone loves to receive money and and it’s really easy to put these funds towards new electronics (I’ve had my eye on the latest iPhone), BUT before you blow it on a huge new TV, I think that we need to relook at how we can save/invest the refund as this is an excellent way to invest tin your future. Yeah, I know, not as fancy as a TV but TRUST me, your future self will thank you!

So what are the best practices for using a tax refund? It’s very tempting to splurge, but there are a variety of ways to effectively use this cash.

How Americas plan to spend their refund

Here are a few suggestions about how you can spend your tax refund

1.       Pay down high interest credit card debt

What a great time to nip your debt with a nice lump payment. The average interest on a credit card is 19.99%. This makes me very uncomfortable. If you only pay the minimum it can take you years to pay off your current balance.

2.       Start an emergency fund

According to BankRate a $1,000 emergency would push many Americas into debt and most people would be in a bind if they missed just one paycheck. And according to Bank of Montreal 21% of Canadians have less than $1,000 in available emergency funds.

Without an emergency fund, an unexpected expense can send you on a debt spiral. So how much is enough? Some money experts say that an emergency funds should contain about 6-8 months’ worth of living expenses.

3.       Save the funds in a high yield savings account

The next best thing to do with a tax refund is to save it. Putting your refund towards a savings goal can help you to not take on debt down the road.

4.       Invest in yourself

Spend this cash on yourself. Is there a class that you wanted to take? Will doing so help you to increase your salary? Then take a look at returning to school to upgrade your skills.

5.       Pay down your mortgage

If you have a mortgage that allows you to make additional payments without penalty, or an annual lump sum payment between 5 to 20% of the mortgage value, this might be the perfect opportunity to use this cash to pay down your mortgage.

How Canadians will spend thier refund

NOT good ways to spend your tax refund

1.       Skip the casino

If you love the high that we all get from gambling, you may be tempted to spend your tax refund and let it ride. From a pure money standpoint, this is not a good idea. Gambling does not have a guarantee, remember the house always wins!

2.       Don’t buy a car

You may be thinking that this refund can help you to get a better set of wheels. Instead of  buying a car that is more than you need, look for a car that you can pay off in 3-5 years. Another idea is to use the refund as a way to kick start your savings for a new car.

3.       Don’t spend it all on things that you really do not need

With a tax refund, it is easy to splurge and get the 85” TV that you have been looking at, or splurge on new shoes, or a new iPhone. Instead of blowing the entire refund on your wants, try this divide the refund in 3 and use 1/3 for your wants, save 1/3 and pay down your debt with the rest.

Your turn

How do you plan to spend your tax refund? Share your thoughts below.