By Stephanie Miller


5 Min. To Read

* Editorial Disclaimer

This post may contain references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. The content or opinions contained within this post come from third party journalists or members of the Editorial Team and are not supplied by any of our partners.

It’s finally here: tax time. The W-2s and 1099s are hitting mailboxes, piles of receipts are spread across the kitchen table, and, if you’re like me, there’s a tear or two shed over just how much student loan interest was paid out last year.

Most of us can agree that it’s better to get money back from the IRS than to owe Uncle Sam (though, arguably, you should recalculate your withholdings to avoid a tax return entirely next year). But if you’re expecting a refund from your 2018 filing this spring, just remember that this isn’t “free money.” It’s the interest-free loan you gave the government all year, and you should make a plan to put that money to work.

Any tax refund check you receive should be subject to the same rules and budget restrictions as the rest of your monthly income, at the very least. By making a plan for your IRS rebate before the funds even hit your bank account, you’ll ensure that you don’t let the windfall go to waste.

Set Specific Goals

According to data from GoBankingRates, the average taxpayer set to receive a refund this spring is expecting about $3,030. This number has been steadily climbing for the last few years, meaning that recipients have a bigger return than ever to work with.

You may have an idea of what you’ll get back this year, or it might be a complete surprise until you actually go to file. But whether you get $500 or $5,000 back, you can still set specific goals now to make the biggest difference with that money.

Sit down and take an inventory of your financial situation at-present. Which areas need the most attention or are costing you the most money?

Your No-Interest Loan Already Cost You Money

Why is it so important to spend your tax return as wisely as possible? Well, that money already cost you quite a bit throughout the year.

Getting a tax refund means that you overpaid on your taxes for the year, once all deductions and exemptions are factored in. This overage was, in essence, an interest-free loan that you gave the government all year long (spoiler: they wouldn’t have done the same for you).

Had you adjusted your withholdings and kept that money in your paycheck, you could have put it to work for you.

What could you have done with an extra $3,000 last year? If you have high-interest credit card debt, you could have paid down your balance. This would have meant less in finance charges over the course of the year; thanks to compound interest, you could have saved a LOT.

The same goes for investing, but in the other direction. If you’d added that $3,000 to your retirement portfolio, it could have grown all year long. In fact, you’d be earning interest on your interest today, rather than just getting your money back from Uncle Sam.

Those funds could have also worked as an emergency fund, giving you peace of mind all year long. You could have added them to the money you’re saving for your next down payment, or even contributed more to your child’s educational savings.

The point? If you spend your tax refund on something frivolous, you’re losing out twice. Not only did you not put your money to work for you all year long, but you’re also getting further from your goals by blowing that money now.

Pick Your Priorities

Everyone has a different financial focal point, depending on their personal situation and even their circumstances at-present. Figuring out where your tax refund can have the biggest impact is individualized, but more important than you may realize.

Take an inventory of your situation and where you need the most work. Consider Dave Ramsey’s “baby steps” here, if you need to: your first two priorities are building a $1,000 emergency fund and paying off high-interest debt, like credit cards.

Determine what amount (or percentage) of your refund will go toward each goal. Then, commit to following through with your plan. Blowing all that money on something fun might feel like a good idea now -- especially with stores and car dealerships offering tax specials -- but it will cost you big in the long run.

As with any financial aspirations, setting concrete goals is the best way to succeed. Knowing what you want is important; making specific plans for your approach – including using your tax refund to pay off debt or save for retirement – is how you actually get there.

If you’re expecting a refund from your 2018 filing this spring, just remember that this isn’t “free money.” It’s the interest-free loan you gave the government all year, and you should make a plan to put that money to work.

Table of Contents