Column, Money Matters

How to spend (or save) your tax refund

By Kevin Theissen

What are you going to do with your tax refund this year?

Through the end of March, the IRS received over 81 million returns and processed just under 79 million returns. To that point, the IRS has sent out just under 60 million refunds checks totaling $188 billion. The average tax refund is $3,263, which is 12.5% above a year ago.

While many would argue against giving the government an interest-free loan, many others like what can be called “forced savings.” So how should you best spend — or invest your refund and know that these ideas apply to any kind of lump sum that you receive — for example bonus, gifts or inheritance.

Consider an emergency fund because it’s so important to have reserves. Life happens and to have cash set aside will ease the blow and protect you from risks like unemployment, car breakdown or anything unexpected. Six months to a year of cash “to keep the lights on” is a good rule of thumb.

Pay down or off debt. Some believe it’s best to start with higher rate credit cards or loans. Others think you should first pay off with the card with the lowest balance as a way of getting a mental win. Student loans still haven’t been forgiven and pay down and finally off is a big relief for many.

The fundamentals of having a solid financial life include saving enough and investing properly. If you were to apply the average refund of $3,263 and deposit into an investment account and have it invested in a simple S&P 500 index, it could accumulate to nearly $60,000 in 30 years. You could invest for yourself or others. For example, you could start a 529 education savings account for your children or grandchildren.

Charitable giving decreased during the Covid pandemic and to encourage giving again, the tax code allowed a $300 tax credit for single taxpayers (and $600 married) over and above standard deduction. There are plenty of people and places that could benefit, and it might make you feel good too.

Lastly, and this is what most (for better or worse) do with their refunds — go have some fun. Many of us have been cooped up for so long it might be time to live a little again.

Kevin Theissen is the owner and principal of HWC Financial.

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