The Tax Question: Save, Spend, or Pay Off Debt?

by Kristina on March 23, 2011 · 5 comments

If you are getting a tax refund, how will you use it? This year I am receiving a $3512 tax refund.  I know that it is better to receive a tax refund rather than owe money to the government, however this year’s refund was very small compared to my tax refunds in previous years. Considering the average tax refund this year is just over $3000, I guess that according to my annual personal income taxes I am an average tax payer.  This year the deadline to file our personal income taxes is April 18.

This is the lowest tax refund that I have received in several years.  I know that I should be happy that I don’t owe money to the government, but in all honesty (and a little bit of greed) I miss having an above average tax refund.

Last year I received $8600 in a tax refund. I used a small portion to pay off accumulated debt; I used some of it to prepay my rent for 3 months, and the rest I spend on materialistic goods.  The year before that I received an $11,000 tax refund which I used to buy a new television and take a trip. In 2007 I received a tax refund of approximately $5900 which I used to refurnish our bedroom.  I have never saved any money from any of my tax refunds over the years.  I consider it as extra money, and therefore I don’t feel the need to save it.

According to CNN this year people will not be spending their tax refund, and they will not be using their tax refund to pay off debt; this year people will be saving their tax refund.  How will you use your tax refund this year? Will you spend it, save it, or use it to pay off debt?

This year I will use $500 from my tax refund to pay off some accumulated debt, and the other $3000 I will keep in cash savings.  I may use it to take a trip in the fall, or I may use it to refurnish/redecorate our living room, but for the time being I am just going to save it.

Once again, I am an average tax refund recipient because I am not spending my tax refund on materialistic goods.  Just like the majority of tax payers, I will be saving the majority of my tax refund.  This year I am within the 43% of people who confirm they will be saving their tax refund.

I have learned firsthand over the last few years that we should not take money for granted.  This may be why I have decided to save my tax refund this year, as opposed to spending it.  I know how quickly a dark financial cloud can move in, and I know how quickly a rainy day can come.  My rainy day account is mostly invested in short term fixed income investments, this $3000 cash will be a nice addition into the mix.

Photo by Jeff Sandquist

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{ 4 comments… read them below or add one }

1 JoeTaxpayer March 23, 2011 at 3:46 pm

My goal is to owe right to where the next $100 would be penalized.
Anything less would mean I’ve lent the government money interest free.
Don’t get me wrong. I understand that for others, the goal may be zero, if their return shows exactly zero owed/back, they nailed it. Others want a refund.
I do taxes for one woman who felt a refund was success. Since her entire tax payment is paid by withholding funds from her RMD (ira) I learned to adjust it so she gets about $200 back. Forget the real money saved by other things I know to look out for, the huge Roth balance all taxed at 15% over the years avoiding 25%. The $200 back is what she sees.

2 Ryan March 23, 2011 at 4:08 pm

I received refunds totaling about $1,200 this year, all of which went toward debt. I will adjust my withholdings this year to hopefully get that number much closer to $0. It’s great to receive a refund when the time comes, but if you are able to calculate what needs to be taken out each pay period so that you don’t pay out OR take in money, that is ideal. For those waiting until the end of the year to receive a fat tax return with which you’ll use to pay down debt, think about the interest that’s accrued throughout the year that added onto the principal, and thus the overall balance. This could have been avoided by receiving more in your paycheck each pay period and paying more toward the loan throughout the year. Think about the same idea if your plan is to put the return into savings; instead of you earning interest (even if its negligible), you’re forfeiting it to the government.

3 Jon | Free Money Wisdom March 23, 2011 at 11:31 pm

I’m sorry but I have to disagree with you about owing money. It’s ALWAYS better to owe the government money. That means that you received interest on your money instead of the government making money off of you. But that’s besides the point haha…

I got 7k back (college tuition credits) and paid a large chunk of my car loan and boosted my emergency fund. It’s boring I know, but for me those were the two best decisions I could’ve made.

4 Mike Corbin January 19, 2012 at 11:25 am

I agree it is better to owe, but it sure is nice to get that refund!

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