Most Popular Ways Americans Spend Their Tax Refunds
According to the IRS, the average tax refund in 2016 was $3,053. While we here at Wise Bread generally advise against giving the government a free loan all year, there's no arguing that a tax refund can go to good financial use. But how, exactly do most Americans spend their newfound chunk of change?
What do most people spend on?
Fortunately, the majority of people use their tax refund to pay down debt, save, or invest. In a poll conducted by GoBankingRates, 41 percent of people deposited the money into their savings account and 38 percent used it to pay off debt.
More than half of millennials plan to use their refunds for savings and debt repayment. This is a major change from previous years, when the tendency for this age group was to spend on splurge purchases (clothes, video games, new shoes, etc.). Gen Xers are the second group behind millennials most likely to use their refund for debt repayment, and younger Gen Xers (35–44) are the second most likely behind boomers to fund a vacation. While baby boomers age 65+ are less likely to receive a refund, they are currently more likely to spend it on a vacation or splurge purchase than other generations. Despite more boomers spending on themselves, 42 percent still allocate their refund to savings.
Smart ways to use your refund
If you're getting a tax refund this year, you might be tempted to splurge. While there's nothing wrong with treating yourself once in awhile, your money would be better spent in these smart ways.
Boost your emergency fund
You should have three to six months' worth of expenses saved for a financial emergency. If your savings account could use some padding, this is the perfect time to save without feeling the burn. Your future self will be grateful for your savviness. (See also: 50 Smart Things to Do With Your Tax Refund)
Pay down debt
According to a GoBankingRates survey, the top source of financial stress for Americans is paying off debt. Fortunately, your tax refund can help ease that stress. Consider using the money to make an extra mortgage or student loan payment, or help tackle your high-interest credit card debt. (See also: Fastest Way to Pay off $10K in Credit Card Debt)
If you already have an emergency fund to fall back on, then consider using your refund to pad your retirement accounts or other investments. You can also begin diversifying your portfolio to mitigate risk and potentially increase your returns.
Invest in yourself
If you've considered taking classes, focusing on your hobbies, getting in shape, or starting a small business, then it might be worth using your refund to fund these ventures. By investing in yourself, you'll continue benefiting from the refund over time.
Make small home improvements
Have you been putting of small fixes around the house? It's time to tackle them now before they turn into a bigger problem. Simple upgrades are not expensive, and can result in a higher resale value and future tax benefits. (See also: 10 Cool DIY Home Improvements for $20 or Less)
If you're feeling financially secure in your own life, consider paying the funds forward. Donating your refund to a worthwhile charity ensures that the money is going to great use. It can also reduce your taxable income for the next tax season. (See also: Can I Write It Off as Charity?)
Treat it like a paycheck
Figure out how much of your paycheck you allocate to certain expenses each month (food, mortgage, gas, etc.) and treat your tax refund the same. Don't forget to include any debt payments. Just like a typical paycheck, you might even have a small amount leftover to use for something fun.
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