Get ahead with these wise uses for your tax refund
By: Ann Berry, Ph.D., MBA, RFG, Family Economics Specialist, UT Extension; and
Amy H. Elizer, Ed.D. – Extension Agent and County Director, UT Extension
For some people getting a tax refund feels like winning the lottery. Others view the
refund as a type of savings account that keeps them from spending. Either way, what it really
means is that they allowed Uncle Sam to hold their money throughout the year rather than having
it to spend or save themselves. By the end of December 2017, the IRS had distributed more than
100 million individual tax refunds for the year with each refund averaging $2,895.
It’s important to resist the temptation to blow this money. Instead, now is a great time to
use your refund to improve your financial future. What you need to do to improve your financial
future is dependent upon your current status. To make wise use of your tax refund it is important
to have a plan. While tax laws have changed and all the repercussions are yet unknown, one
thing is certain—all taxpayers need to check their withholding on W2’s to make sure enough
taxes will be taken out for 2018 so you don’t get a surprise next tax season.
Basic guidelines are to use part of your refund to pay down debt, save some of it, and
spend some of it. People can find themselves in various financial situations, though, and each
has a different strategy that can be addressed with a tax refund.
If you live from one paycheck to the next or have little in savings, do yourself a favor and
start an emergency fund. This fund can take up the slack if you hit a bump in your financial road.
Try to build and keep an emergency fund of at least $1,000; your refund can help you start this
step toward financial security. You can also use this emergency fund cushion while you
determine where all your money is going and help you make any new changes to your spending
and saving habits. To learn where your money is going, save all receipts for a month. At the end
of the month, divide your receipts into spending categories. This can be eye-opening because it
may show you the spending leaks or at least places you might decide to economize. Typically,
people have some expenses that they can curtail if they have a goal to change their financial
future. Even one beverage from a vending machine day during the work week at $1.25 each adds
up to $326 in a year.
Do you have debt and feel like it’s controlling your life? Organize your debt by making a
list of accounts including the creditor’s name, APR, minimum payment, account balance, and
payoff date. You could use the refund (or part of it) to determine to pay off or pay down on the
accounts with the lowest balances or the ones with the highest interest rates. This only really
works though if you stop adding to the balances. This idea accelerates the payoff dates if you
commit your minimum payment amounts to additional amounts to be paid on the remaining
accounts. There are online programs and smart phone applications, such as PowerPay,
https://powerpay.org/, that can assist you in seeing how quickly this strategy can get you out of
debt. UT Extension also has publications that can help you with your debt repayment plan.
https://extension.tennessee.edu/publications/Documents/SP710-A.pdf
https://extension.tennessee.edu/publications/Documents/SP710-B.pdf
https://extension.tennessee.edu/publications/Documents/SP709-A.pdf
https://extension.tennessee.edu/publications/Documents/SP709-B.pdf
Has poor credit prohibited you from making a purchase or caused you to have a high
interest rate? Use your refund to pay back at least a portion of your debts, which will begin to
improve your credit score. The factors making up your credit score with the biggest impact are
your payment history and your amounts owed. You may be able to negotiate with your creditors
to settle your debt with a lower amount than you actually owe. Be sure to get agreements in
writing before you send money and don't give access to your accounts. If you are not sure what is
on your credit report, get your report from each of the three reporting agencies—Equifax,
Experian and TransUnion. These are free at www.annualcreditreport.com for all consumers one
time each year. Purchasing your score is not necessary because information on the report is what
you need to know in order to make a repayment plan or address incorrect information.
If you are considering a large purchase such as a home, save your refund for a larger
down payment or for costs associated with moving. New homes often create new needs and
wants, such as movers, utility deposits and furnishings.
Do you need better transportation? Trade-in your current vehicle and put that money
together with your refund to make a purchase without going into debt.
Are you making steady payments on your home or car? Are you saving for your child’s
college fund or your retirement? Perhaps you could benefit by paying down your principle
balance or adding extra to your savings and investments. Make home improvements that will
save you money. For instance, you can lower your heating and cooling bills by installing double-
pane replacement windows and adding insulation to your attic. Consider making an extra
mortgage payment to reduce your principal; an extra payment each year on a 30 year loan can
shave four years off your mortgage. If you have not been putting aside for retirement as you should, you could also consider adding a portion of your refund to your 401(k) or other
retirement savings account.
If your financial picture is looking good, consider some ways to invest in yourself and
make the future brighter for your family or others. If you don't already have one, create a will. If there are people dependent on your income—whether children or a spouse, buy a term life
insurance policy. Considering investing in yourself. Take a class or go back to school to improve
your job skills and boost your income. Invest in your health-- join a health club and start working
out. Purchase something you have always wanted. Buy a computer and use it to track your
budget and savings goals. Take a vacation. Donate some to charity.
These principles also apply if you receive a raise or unexpected overtime hours. Even
with smaller amounts of money you can make a difference in debt repayment and savings. The
most important step is making a plan and getting started.
