Does Uncle Sam owe you a tax refund? Don’t use it all in one place.
During the first week of tax season, at least, returns and refunds are down. The IRS says it processed 13.31 million returns, a 25.8 percent drop from last year. The average refund was $1,865, about $171 (8.4 percent) less than the same period last year. (Over the whole of last year’s tax season, the average refund was about $3,000, with recipients of some tax credits receiving more than twice that.)
It’s hard to draw conclusions from a single week. But we do know that thanks to the new tax rules, some of us can expect bigger refunds than they got last year, and others, smaller ones. You won’t know which camp you’re in until you file your return.
Even if your refund is smaller than you’re used to, you can still make the most of it. The right mix of spending, saving and debt reduction can help you build up your financial safety net, says Susan Bradley, a certified financial planner and founder of the Sudden Money Institute in Palm Beach Gardens, Florida.
“It’s a good idea in life to have a system for when you have more than you’ve expected,” Bradley says. “Pause. Don’t just cash the check and go.”
Here’s how to think about splitting up your refund:
Yes, spending really should be the first thing you think about when it comes to your refund, Bradley says. Almost 8 in 10 Americans are living paycheck to paycheck, according to CareerBuilder. Odds are good that there’s at least one important purchase or expense that you’ve been putting off because it just wasn’t in the budget.
“Think about what in your life needs some shoring up,” she says. “Maybe you need dental work, or new tires on your car…think of things that can make your life a little bit better, a little bit safer.”
(It’s OK to plan on spending a small slice of your refund on something that’s not purely practical. “Maybe it’s a dinner out, or sneakers, or a concert ticket,” Bradley says. “Things you might not otherwise be spending money on.”)
Here’s an investment that can get you a 17 percent return on your tax refund. In Acorns’ latest Money Matters Report, almost 4 in 10 say they carry a credit card balance, and 1 in 5 have more than $5,000 in debt. (The average card interest rate? About 17 percent.)
Using part of your refund for debt payoff can help you get ahead of compounding interest to dig out of a large balance faster, or knock out a few smaller debts completely, says Victoria Fillet, a certified financial planner with Roosevelt Investment Group in New York.
Even if there are other debts and goals competing for your refund dollars, aim to save at least some of that money. Building your rainy-day savings is a good place to start, says Fillet, but you could also boost your balance for a retirement or college goal, or seed your investment account. With the advantage of time, a small contribution can still go a long way.
“Some people think if they don’t have a large sum of money to put away, they might as well do nothing at all,” she says. “If you can start with $10, start with $10. It’s never too little.”
We’d like to hear the financial goals you’re fired up about and the milestones you’re hoping to achieve. Let us know your best strategies and successes. If you need us to tackle a specific topic, just ask! We’re in this together, so let’s get this conversation started. Send an email to email@example.com.