How Should I Use My Tax Refund?

Contributed by: Jaclyn Jackson Jaclyn Jackson

Tax filing season is over and many people are entitled to get money back from Uncle Sam.  While most of us are tempted to buy the latest gadget or book a vacation, there may be a better way to use your tax refund. If you are pondering what to do with your tax refund, here are a few questions to help determine whether you should SAVE, INVEST, or SPEND it.

Have you been delaying one of the following: car repair, dental or vision checks, or home improvement?

If you answered yes: SPEND

If you had to be conservative with your income last year and as a result postponed car, health, or home maintenance, you can use your tax refund to get those things done.  Postponing routine maintenance to save money short term may add up to huge expenses long term (i.e. having to purchase a new car, incurring major medical expenses, or dealing with costly home repairs.)

Do you have debt with high interest rates?

If you answered yes: SPEND

High interest rates really hurt over time. For instance, let’s say you have a $5,000 balance at 15% APR and only paid the minimum each month.  It would take you almost nine years to pay off the debt and cost you an additional $2,118 interest (a 42% increase to your original loan) for a total payment of $7,118. Use your tax return to dig out of the hole and get debt down as much as possible.

Could benefit from buying or increasing your insurance?

If you answered yes: SPEND

  1. Consider personal umbrella insurance for expenses that exceed your normal home or auto liability coverage.
  2. Make sure you have enough life insurance.
  3. Beef up your insurance to protect against extreme weather conditions like flooding or different types of storm damage that are not normally included in a standard policy.  Similarly, you can use your tax refund to physically your home from tough weather conditions; clean gutters, trim low hanging branches, seal windows, repair your roof, stock an emergency kit, buy a generator, etc.

Have you had to use emergency funds the last couple of years to meet expenses?

If you answered yes: SAVE

Stuff happens and usually at unpredictable times, so it’s understandable that you may have dipped into your emergency reserves. You can use your tax refund to replenish rainy day funds.  The rule of thumb is to have at least 3-6 months of your expenses saved for emergencies. 

Are you considered a contract or contingent employee?

If you answered yes: SAVE

Temporary and contract employment has become pretty common in our labor-competitive economy where high paying positions are few and far between. If you paid estimated taxes, you may be eligible for a tax refund. Take this opportunity to build up savings to buffer against slow seasons or gaps in employment. 

Could you benefit from building up retirement savings?

If you answered yes: INVEST

Get ahead of the game with an early 2016 contribution to your Roth IRA or traditional IRA.  You can add up to $5,500 to your account (or $6,500 if you are age 50 or older).  Investing in a work sponsored retirement plan like a 401(k), 403(b), or 457(b) is also recommended so you could beef up your contributions for the rest of the year and use the refund to supplement your cash flow in the meantime. 

Are you interested saving for your child’s college education?

If you answered yes: INVEST

College expenses aren’t getting any cheaper and there’s no time like the present to start saving for your child’s college tuition.  Money invested in a 529 account could be used tax-free for college bills with the added bonus of a state income tax deduction for you contribution.

Could you benefit professionally from entering a certification program, attending conferences/seminar, or joining a professional organization?

If you answered yes: INVEST

It’s always a good idea to invest in your development.  Why not use your tax refund to propel your future?  Try a public speaking or professional writing course; attend a conference that will give you useful information or potentially widen your network.   

Did you answer “no” to all the questions above?

If you answered yes: HAVE FUN

Buy the latest gadget.  Book the vacation.  You’ve earned it!

Jaclyn Jackson is an Investment Research Associate at Center for Financial Planning, Inc. and an Investment Representative with Raymond James Financial Services.


This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Please include: Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Hypothetical examples are for illustration purposes only.