Tax refunds: Top 5 ways Americans will spend their windfall
Though this year's tax season got off to a slow start on the refund front, things have since picked up. In fact, an estimated 60% of filers expect to get a refund this year, according to data from TD Ameritrade. And the good news? Many (though not all) Americans plan to use that money wisely.
Here are the top five things filers plan to do with their refund cash and some could improve your personal finances.
1. Put the money into savings
The most popular thing Americans plan to do with their refunds is use it to pad their savings. Seeing as how 58% of U.S. adults have less than $1,000 in the bank, that's a smart move. At a minimum, you should aim to always have three months' worth of essential living expenses available in savings account for emergencies, so if you don't, there's no better place for your tax refund than in the bank. An even better bet, however, is to sock away enough cash to cover up to six months' worth of living costs. This especially holds true if you own a home and have dependents to worry about.
2. Invest in stocks
Second to boosting savings, Americans are intent on using their tax refunds to start investing. And that's a positive thing, because if you put money into stocks now, you might have a lot more of it in 10, 20, or 30 years. The stock market has historically returned about a 9% annual return on average. Now let's be a bit conservative and assume that your investments will give you an average annual 7% return. If that's the case, and you invest a $3,000 refund, you'll end up with $5,900 after 10 years, $11,600 after 20 years, and $22,800 after 30 years.
3. Pay for a vacation or event
Saving money and investing are responsible ways to use a tax refund. Paying for a vacation or event? Not so much. If you're lacking in savings or have debt of any sort, then you're better off using that cash to pad your bank account or chip away at whatever balance you're carrying. However, if you're in a good spot savings-wise, don't have debt (other than a mortgage), and have an investment account already, then you should feel free to spend your refund on something you'll get lots of enjoyment from.
4. Pay down credit card debt
You're probably aware that credit card debt can be costly, since the longer you carry it, the more interest you'll be charged on top of the original principal you racked up. But too much credit card debt can also hurt your credit score. One major factor that goes into determining your score is utilization, or the extent to which you're using your available credit at once. The higher your credit card balances, the higher your utilization, and the more your score is apt to get dragged down, thereby making it more difficult for you to borrow affordably in the future. Using your tax refund to pay down credit card debt is therefore an extremely wise idea.
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5. Pay off other debt
Maybe you have a nagging student loan balance to deal with, or want to chip away at your mortgage. Paying down non-credit card debt is another smart way to use your refund. That said, if you're talking about knocking out some healthy debt, especially that of the mortgage variety, but you're lacking in the savings department, it pays to boost your cash reserves and find other ways to get ahead on your home loan. While it's true that making extra payments toward your mortgage will shorten the life of your loan, you're much better off building a healthy emergency fund and then focusing on getting out of housing debt.
No matter what you do with your tax refund this year, know this: Just because you got money back from the IRS on your 2018 return doesn't mean the same thing is guaranteed to happen next year. Therefore, if you have important financial priorities to tackle, use your newfound cash to address them, and resist the urge to blow your refund on something frivolous. Or, at the very least, compromise by putting most of that cash to responsible use, but reserving a small portion for something fun as a reward for having gone through the process of dealing with your taxes in the first place.
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