You Got Your Tax Refund, Now What?

by AJ Pettersen · 11 comments

Tax season is upon us. If you haven’t yet received your tax forms, you will be getting them soon. Getting a refund is exciting, but many treat it as though they won some sort of prize. Some decide to go and spend their refund on a big vacation or on a new entertainment system, but are those really their best options? Tax refunds are somewhat unplanned amounts of cash coming back into your bank account. Turning them into investments for the future or paying down debt are great ways to better your financial future.

My fiancé and I recently received our W2 forms from our employers and filled out our information online. We found out we were both going to receive a nice refund. Our taxes are filed separately as we are not married yet, but our finances are already combined. How we spend our refunds individually will affect the both of us. So we asked ourselves, what is the most beneficial way to spend our refunds?

My Refund

I would be getting a $1600 refund. I didn’t know whether to be excited because of the large lump sum or disappointed because I could have used that money throughout the year. Without anything that I need at the moment, I decided I could either invest the money or pay off some debts. I still owe my fiancé’s mom some money for a loan she gave me a year ago. I decided that this would be the best use of my money. Paying off debts is a good feeling because it brings me (and my fiancé) one step closer to being completely financially free.

My Fiancé’s Refund

My fiancé found out that her refund would be nearly $1400. This was due to her claiming no exemptions and her new job over-withholding on her paychecks. Paying off her student loans has been a point of emphasis for the both of us since we graduated from college and found employment. A large chunk of our income every month goes towards paying down the loans. We hope to have them completely paid off in a few years, while still having enough money saved up to put a down payment on a house. Her financial freedom from her loans is very directly tied to our financial freedom as a couple, which means that making an overpayment on her loans with her tax refund would be the best option. With the interest rates on the loans being much higher than any safe investment, this is the best way the money could be spent financially anyway. At a 6.8% yearly rate, the $1400 payment will save us over $300 in interest over the next three years — an investment worth making.

What Will You Do?

Using your tax refund to buy something extravagant and unnecessary is financial irresponsible. Proper planning is imperative when it comes to tax refunds. Weigh all of your options before deciding what to do with your money. Maybe your family really needs a new television or a vacation, but making a quick decision could lead to future problems.

How will your refund help you reach your goals sooner?

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  • AJ says:

    AJ Pettersen,

    Emotionally, the $1600 is wonderful. Practically, it’s not a good financial plan to pay Uncle Sam the free interest loan. That’s $30 in your weekly paycheck, $133 monthly. It’s not a huge amount but helpful.

    Most people like the refund because it’s a forced saving account; some see it as gravy. Personally, I check the W-4 IRS calculator quarterly to shoot for the lowest refund without owing. More often if I make changes to my 401k traditional or 401k Roth.

    There is no right or wrong reason for having a large or small refund. Hey, to each his own.

  • Allison says:

    Better yet, get a head start on making a 2012 IRA or Roth IRA contribution. You’ll get one more year of compounding, which will be worth much more over the 30-ish years before you retire than the extra student loan payment would be, unless your student loan is at an interest rate of more than 4-5% or so. Most gov’t subsidized loans have really low rates – I have one at 2.36%. It’s the smallest, and I could pay it off no problem, but why would I? I’ll get a much better return by investing for retirement.

    • AJ Pettersen says:


      You’re exactly right. My fiancee’s loan is at 6.8%, which is tough to beat in this market. Paying off the debt makes more sense for us right now. Glad to hear you are being realistic about your finances. Paying off debt immediately isn’t always the best option.

      • Allison says:

        Oh yeah, get rid of that sucker then! You just didn’t mention the retirement planning, so it made me wonder. I’m splitting the difference and putting an extra $50 towards my biggest loan, which has a 5% interest rate, per month. The next biggest loan is about half that balance and 4.8%, and then my piddly loan at 2.36%. When I started paying on my loans last year, I made the mistake of paying double on the smallest loan, even though it had the lowest interest rate. So now, I’m paid on that one through like November, and I stopped paying so that I can pay extra on the high interest rate loan. Even 4.8% is probably tough to beat right now, but there’s also the added psychological factor of having savings. I finally calculated my net worth last week while bored at work, and was pleased to discover that my retirement account has more money in it than the balance of my student loans, plus I have a few thousand euros in savings (I live in France now), and I even opened up a French tax-advantaged homeowners’ savings account. My French savings accounts get 3%, 2.5%, and 2.25% interest, but since the interest isn’t taxable in France (and I don’t have enough taxable U.S. income to pay U.S. income tax) I’m probably barely breaking even or even losing slightly on the interest rates. But the growing balance is encouraging.

        • Allison says:

          My U.S. savings account isn’t even getting 1% interest, though, so it’s doing me absolutely no good. (And even losing me money in this economy!)

          • AJ Pettersen says:

            Pretty cool you are living in France, good for you! I made sure to pay off the 6.8% first because the other is around 3.5%, but 2.36%?! That is amazing.

            Glad to see you are keeping track of your finances. I am young, but I have seen too many people lose sight of their financial goals.

  • Carl Lassegue says:

    I do not think people realize how much they save my paying off debt early. By paying off early AJ saved $300. Imagine how much homeowners can save over the life of the mortgage if they pay off a little extra on their mortgage every month.

  • frugalista says:

    Because I am debt free (aside from a mortgage) I am using part of my refund to pay for my summer golf membership and then the rest will go into savings. I read a lot about finances but disagree with “not getting a refund”. By taking more out of my paycheck, I budget with what I have left each month. I don’t have to pay at tax time, and the money can be used for something that I have “sacrificed” during the year. I know what the “experts” say but if it works for me, and I am able to reach my financial and life goals, then it is the best plan for me. good luck to everyone! 🙂

  • Marbella says:

    Tax refunds are often a pleasant surprise, it’s best to make repayments on loans and not spend it; it is often just a lot of impulse purchases you regret after a while.

  • Mama says:

    My goal is usually to put 75% of my refund into savings immediately. This year, I will need to spend a portion to do some repairs on the foundation in my home, repairs I can no longer afford out of my regular wages. After that is paid for, I might treat my family to a meal out and then the rest will go into savings and my emergency fund, I will have upcoming repairs on my aging vehicle.

  • KM says:

    My husband and I have a list of goals on our whiteboard – goals that are expensive or time consuming (like my eye surgery or repainting our home), so I think the refund will probably cover at least one goal, pay property taxes on the condo (like it always does), and the rest will go into savings. I just found out that we will have another child, so the savings part will be stressed.

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