Getting a Tax Refund? Don’t Spend It — Save It!

You finish preparing your income tax return to learn you’re set to get a tax refund. According to IRS data, that makes you one of 40 million taxpayers getting money back, with the average refund totaling about $3,120.

For plenty of Americans, that represents a real windfall. Who couldn’t use a few hundred or few thousand extra dollars to round out the budget?

But wait! Before you rush to spend that “found” money, consider how you might use that money strategically to improve your financial situation:

• Do you have more debt than you’re comfortable with? Paying down a chunk of debt with your tax refund could help you build momentum to get it paid off, saving you on interest payments and relieving anxiety.

• Do you have an emergency fund for unexpected expenses? If not, use your tax refund to build your emergency fund now, so you can prepare for unanticipated auto repairs, health expenses or a job loss. (And if you’re out of debt and have already started an emergency fund, consider shoring it up).

• If your debt is under control and your emergency fund is in good shape, consider opportunities for investing your refund, perhaps through a traditional or Roth Individual Retirement Account (IRA), or starting a 529 plan to save for your kids’ college. Talk to a financial professional to find out the best strategy for your and your family’s needs. (And remember: it’s never too early to start saving for retirement!)

• If you received a substantial refund, you may be withholding too much from your paycheck, so you might consider adjusting the amount you are withholding from your paycheck. Then you could take the extra money in each pay period and direct it toward increasing your contribution to your 401(k)-which will lead to faster accumulation of your retirement funds.

As most Americans are focusing on their tax filings, now is a good time to think about how you can improve your financial standing — and making better use of your tax refund is a great way to start building better savings habits.

April is National Financial Capability Month, and as most Americans are focusing on their tax filings, now is a good time to think about how you can improve your financial standing-and making better use of your tax refund is a great way to start building better savings habits.

For more on developing financial literacy skills, check out our past Project Invested posts on How to Improve Saving Habits, How to Teach Your Kids the Importance of Saving, How to Talk to Your Parents About Money, America Saves Week, Wells Fargo’s “Path to Good Credit” initiative and the “Better Money Habits” initiative from Bank of America/Khan Academy.

*Project Invested does not give tax, legal or investment advice and readers should consult a tax adviser if they have questions.