Ed note: For many Americans, a tax refund is their largest single financial transaction in a year. So what you do with that money can be very important. Contributor Carrie Smith looks at some of the most common, and some of the best, ways to spend it. Leer en español.
Have you filed your taxes and received a refund? Before you blow the funds on the newest electronic or gadget, see how other Americans are spending their refund and smart strategies to make the most of it.
1. Ways to smartly use your tax refund
What’s the best way to maximize your refund? Of course you have to do what’s best for your personal finances, but the best strategies include:
- Attacking your debts and paying them off
- Saving the money in a retirement account
- Catching up on bills and other household expenses
- Stashing away a small cushion for emergencies
- Take a vacation to de-stress and mentally recharge
2. How are other Americans spending their refund?
According to a consumer survey by the LIMRA LOMA Secure Retirement Institute, 44% are planning on using their refund to pay down debt, while only 9% are planning on putting their refund into a retirement account. These are two of the best ways you can spend your refund because you’re investing in your future.
Ignoring the impulse to spend today and save your money for a rainy day is always a smart strategy that can lead to wealth. However, in the same study, many Americans stated they want to use their refunds for vacations. A little time away could be just the break you need to recharge.
Other respondents said they would use it for everyday expenses, rather than paying off debt or increasing retirement savings.
In a larger Edward Jones survey, only 8% of Americans said they plan to spend their tax refund on something fun, like clothes and entertainment, and 52% will spend it on something necessary, like household expenses or credit card debt.
3. What groups are spending versus saving?
If you’re between the ages of 55 and 64, you’re most likely to save your refund, while 25% of those between ages 45 and 54 are planning to save their refunds. Essentially, the older and closer to retirement you are, you’ll probably be prone to save more of your tax refund. Likewise, taxpayers that fall into the younger age brackets, or those between 18 and 34, are more likely to spend their refunds on fun things, like new clothes, eating out and entertainment.
Although young adults (between 18-24) spend their tax refund on non-essentials, they’re also very likely to pay bills and everyday expenses while still saving an extra portion for their retirement accounts. Additionally, millennials are most likely to receive refunds, and 67% say they will save or invest their refunds.
These facts still depend on your level of income. More than 60% of those with the lowest household income (<$35k) are likely to spend the return on necessary expenses, compared to only 37% of those with income $100k+. Households that fall somewhere in the middle, and have income between $50k and $75k, are likely to invest their refunds.
Which age group do you fall into? How do you plan to spend your tax refund?