Tax refunds total nearly six weeks of take-home pay for the average American family who receives them, according to a new study from JP Morgan that details exactly how important these government checks are to many U.S. households.
The March report finds that Americans who get refunds typically have lower average incomes and less in savings to pay for unexpected expenses than those who pay taxes each April instead. For families who get a refund, the average totals about $3,600.
And soon after they receive those refunds, it’s no surprise that taxpayers start spending. A week after getting their check, families boost their spending on durable goods, such as home decor, clothing, electronics and more, by 101 percent; credit card payments by 85 percent; and cash withdrawals by 164 percent, according to the report.
But luckily, they don’t spend it all immediately. Six months after getting their refund, families still had an average of 28 percent of their tax refund remaining.
When you get a lump of money like a tax refund, paying off credit card debt is a great way to spend the money. And buying that new washing machine to replace the one that broke down probably isn’t a bad idea either.
But, whenever your household gets an infusion of cash, it’s important to think strategically about how that money can work for you beyond a fun week of shopping and splurging.
Six ways to spend your tax refund wisely
Pay off debt
The average personal debt, not including home mortgages, totals more than $38,000 according to Northwestern Mutual’s 2018 Planning & Progress Report. Credit card debt, car loans and student loans are among the leading sources of debt and all can add up quickly. Drawing down your debt is a perfect way to use that tax refund.
Shore up your emergency fund
Whether it’s a broken furnace or a broken down car, a job loss or a medical emergency, an emergency fund can help you afford the things you need when life has you down. Experts recommend having three to six months’ worth of salary on hand, but every little bit counts—and a tax refund is a great place to start.
Prepare for retirement
It’s always wise to save as much as you can toward your golden years. Think about it this way: Decades from now, when you’re ready to retire, will you remember the shopping spree courtesy of your tax refund or will you be thankful that you set some money aside for the years when you’re no longer earning a paycheck?
Save for your kids’ education
As college costs have skyrocketed, it’s no surprise that educational loans are among the leading sources of debt for millennials, according to Northwestern Mutual’s report. If you hope to help out your own children with their higher education costs, starting a 529 plan is a smart choice. Funds socked away in these college savings plans grow tax free and can be used for qualified educational expenses such as tuition, fees, supplies and more. The College Board has more information about college savings options.
Make plans for the future
Would you like to buy your first home in the next couple of years? Does your own home need renovations? Is your car on the fritz? Are you planning for baby? Look at your future expenses and dreams to determine how much you’ll need to achieve or afford them. Then consider using your tax refund to support those aspirations.
Invest in yourself
Stuck in a dead-end job? Ready for a promotion? Maybe it’s time to boost your job skills, so you’re ready for a better, and potentially, higher-paying career. A community college class or online certification course can be affordable ways to get the skills you need to take your professional life to the next level. And a tax refund might be the perfect way to pay for it.
So, when you get that refund check in the mail, make plans before you spend. You’ll thank yourself later.
If you are experiencing financial difficulty and are looking for a solution, non-profit credit counseling can help you make sense of all your options. Contact us today for a free financial assessment with one of our certified credit counselors.
