5 Ways Americans Will Spend Their Tax Refunds in 2016
What are people going to do with their windfall? Financial website GOBanking Rates asked 5,000 people how they planned to spend their tax refund, and discovered most people had a clear plan for their impending check. Paying down debt or increasing savings were the two most popular uses for a refund.
“Tax refunds are income that falls outside of Americans’ typical paychecks, so even though it’s earned and well-deserved, there is definitely a temptation to view it as ‘free money’ that can be splurged or even wasted,” Elyssa Kirkham, the lead GOBankingRates finance reporter on the study, said. “It’s really encouraging to see, however, that most people are planning to use a tax refund to better their financial situation by saving or paying off debt.”
Using a windfall like a tax refund to get your finances in shape is a good idea, but getting a lot of money back after you file isn’t necessarily a positive. A big refund means you overpaid on taxes throughout the year, essentially loaning your hard-earned money interest-free to the government. Adjust your withholding and you could take home an extra $233 every month, rather than receiving the average refund of $2,797 in one lump sum. You can then use your money to build your emergency fund, save for retirement, or pay down debt, rather than waiting until tax time to get it back.
Despite the financial argument for not receiving a refund, millions of Americans can expect to receive a little of their money back from the government this year. Here’s how they plan to spend their check from Uncle Sam, according to GOBankingRates.
1. Pay down debt
Twenty-seven percent of people surveyed said they’d use their tax refund to pay down debt. Throwing money at student loans or credit card debt is one of the best ways to spend your refund. If you have the average credit card balance of $5,540 and used your tax refund to pay off $3,000 of what you owe, you could be debt-free a year earlier and save yourself more than $1,000 in interest (assuming you’re making minimum payments of 4% and your interest rate is 14%).
One quarter of people said they planned to set aside their refund money for a rainy day, a smart move when you realize more than half of Americans younger than 34 have less than $1,000 in savings. Adding an extra $1,000 or more to your emergency fund will increase your financial security and make it easier to weather a money-related crisis.
3. Take a vacation
Ten percent of survey respondents said they hoped to spend their refund on a little R&R. If you’re happy with your savings and don’t have high-interest debt to pay off, spending your refund on a trip can be a worthwhile investment. More than 40% of Americans didn’t take any vacation days in 2014, even though taking some time for yourself can reduce your stress, improve your relationships, and make you more productive at work.
4. Put it toward a big purchase
Five percent of people were planning to use their refund for a big purchase, like a car or a home. Putting more money down on a vehicle or house means you can get a smaller loan and will pay less interest. In the case of real estate, if you make a down payment of at least 20% you won’t be required to buy mortgage insurance and may qualify for a lower interest rate, potentially saving you big over the life of the loan.
Just 5% of people said they planned to use their tax refund to go on a shopping spree. Splurging might seem frivolous, but if your finances are in good order, you shouldn’t feel guilty about using some of your refund to buy a treat for yourself, provided you buy the right stuff. Though conventional wisdom says you should spend your money on experiences, not things, purchases that make it easier to do something you love can make you happier, according to researchers. Consider that permission to buy yourself a new guitar or surfboard.