Let’s Talk About What We’re Going to Do with Our Tax Refunds

I’m a 20-something living in NYC, and I work full-time and freelance on the side here and there. I just filed my taxes, and I should receive a total refund of approximately $1,100. I don’t have any credit card debt (anymore), but I do have some student loan debt that I’m still paying off. I should mention that I’m in the process of moving to Chicago, and I might have to purchase a car once I’m there (although I’d rather stick a fork in my eye). I’m also trying to save for my wedding. So, should I throw my entire refund at my student loans? Or should I put my refund into savings? — K.

So I’m posting this question because a lot of people have been emailing me variations on this same question: I’m getting a refund this year—what should I do with it?

There’s no one right answer to this question because people earn different amounts of money, have circumstances that are unique to them, and have different priorities. Not everyone has student loans, or weddings or houses they plan on buying. If I were the letter writer above, I would not throw the entire refund at my student loans—I’d squirrel it away into savings and decide what to do with it after I made my move to Chicago. Moving is expensive, and it often comes with unforeseen costs, so that $1,100 will come in handy when the time comes (and that time will definitely come if it’s discovered that a car is indeed needed after the move).

Let’s talk more broadly about what we should think about when getting our tax refunds (if we’re lucky enough to be getting tax refunds this year). The first thing you should think about: Do you have an emergency plan in place if you lose your job? It’s a good idea to have at least $1,000 in a savings account just in case (emergency money). I’ve mentioned this before, but financial “gurus” usually say you need three months, or six months or a year’s worth of savings to fall back on if you lose your job. This is an arbitrary rule of thumb. What they really mean is: What would you do if you lost your job? Some people don’t have family or friends who would let them crash with them if they couldn’t make their rent or lost their home, so they absolutely need a pile of money to fall back on in those circumstances. But a lot of us do have people who could let us crash on their couch or sleep in a spare bedroom while we get back on our feet, so it’s not as necessary to hoard as much cash for “emergency savings.” So have $1,000, and then go from there depending on what your emergency plan is.

Next up: Retirement and debt. If you’re worried about what you’re going to do when you’re retired and don’t have a retirement account, open one up. That’s what you should think about next. See here. (Note: Personally, I save for retirement, but am not too worried about it. That’s because I expect to work past the typical retirement age of 65—not because I’m afraid that I won’t have enough to live on, but because I like what I do! It’s not like I’m going to stop writing once I hit 65.) If you have high interest debt, you should definitely pay those down, because investing in a retirement account won’t do you any good if you have, say, credit cards with killer interest rates. So make paying down that debt a priority.

If you have your emergency plan and debt/retirement in order, sure, you can use the refund to tackle your student loans if it really bothers you, or put it towards a down payment for a car or house, go on vacation, or buy yourself something nice. You know what’s important to you and what your priorities are. After you take care of the big things, you can do whatever you want with your money.

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75 Comments / Post A Comment

WaityKatie (#1,696)

Can we also say though that this person should adjust his/her withholdings for next year, so he/she’s not giving the government an interest-free loan of her money all next year?

RocketSurgeon (#747)

@WaityKatie Exactly. My goal each year is to be as close to a $0 refund as possible, which means I maximize my income throughout the year. This year, I think I get around $270 back. Close enough.

Mike Dang (#2)

I actually go back and forth on this. Because, yes, people who are very good with money could maximize that money in various accounts, etc. But I also think it’s a good way to sort of force people who are bad at saving to save that bit of money, even if it’s interest-free—because if they’re bad at saving, would they have saved up that money on their own?

aetataureate (#1,310)

@WaityKatie I plan on purpose to get as large a refund as I can manage. This year it is literally almost 3% of my income. And, for exactly the reason Mike cited.

Emma Peel (#317)

@Mike Dang I adjusted my withholding one year, because I made something like $28,000 before taxes and got a $1,100 refund — I needed that extra $100 or so every month that year because I was living paycheck to paycheck. Now I make more, kept the old withholding in place, and get about a $700 refund between federal and DC taxes — this feels about right to me.

But as someone who’s generally not great at savings, I think as long as your withholding isn’t hurting you day to day, get the refund. Honestly, unless you were investing that money, interest rates are so low it’s not going to make much difference.

WaityKatie (#1,696)

@Emma Peel I don’t know, I’m pretty bad at savings, which is why I need to squeeze every cent I can get out of every single paycheck. I need all the money now so I can cover my obligations! Basically if I let the gov. keep the money I’m just going to spend whatever that amount is on a credit card, which I will then pay off when I get the refund, so why not cut out the middleman?

WaityKatie (#1,696)

@RocketSurgeon Exactly! Refunds mean you have failed! Failed!!

aetataureate (#1,310)

@WaityKatie “Refunds are a failure!” is a total trope at this point. Oh my gosh, is that why one hundred people have told it to me like God revealing the commandments?? I get it now, thank you for prescribing!

But seriously, I don’t have a credit card, so what you’re describing is not how my life works at all.

@WaityKatie How does someone adjust their withholdings?

Mike Dang (#2)

@totallyunoriginal File a new W-4 with your employer (this is also helpful). Also, you guys, nobody is wrong here. As we like to say around here, do the thing that works for you.

WaityKatie (#1,696)

@totallyunoriginal You’d have to contact your payroll office I think. I work for the government, so we can do it online.

chic noir (#713)

@WaityKatie I did this for two years and I really missed getting that refund check.

I just couldn’t bring myself to spend anything from my savings after saving the difference all year. I guess I also missed being a part of the refund check excitement.

chic noir (#713)

@chic noir – tax refund = Random House bonus

So much money, so many long term plans, ways to save, and chain stores to blow it away.

chic noir (#713)

@aetataureate – how did you manage to get 3% ?

ghechr (#596)

Good advice. We are planning on using 1/2 to pay my husband’s student loan and saving the other 1/2 which will likely be instantly gobbled up by daycare expenses.

eagerber (#1,958)

I’m using mine to pay off some dumb credit card debt I racked up over the holidays (like $300) and the rest will go towards setting up a second money market account. Once I get that started, I’ll set up an automatic $60/month contribution, and then see how I feel about increasing or decreasing the monthly amount. I have student loans that aren’t yet in repayment, but I’m used to “not seeing” money go towards retirement and other savings accounts, and kind of just want to keep “not seeing” money like that grow.

Trilby (#191)

The problem with paying down student loan debt is that you don’t feel the good of it until it’s fully paid off. It’s not like a credit card where paying the balance down results in smaller minimum payments. So that sucks.

My refund is going to pay down the balance on some kitchen cabinet refacing I had done. That debt is on my Citicard, interest free till Sept. I have already adjusted my tax allowences so I have less withholding in 2013, since Soc. Sec. taxes are KILLING ME.

terrific (#1,532)

I already got my federal refund (about $1,250) and have reserved the vast majority of it for my move in a month, but I did put $500 towards paying off my one credit card that still has a balance. I’ve got $350 coming from NY state, and will probably put it all in my emergency fund minus maybe $25 or $50 for funsies. I want it to be $1,000 before I aggressively start paying down debt.

TheDilettantista (#1,255)

This is good timing because I just got the rest of my refund today (I got my state refund earlier). I plan on using it to pay off a long-time debt to my manfriend (he’s in school now, though he wasn’t when he loaned me the money, so he definitely needs the funds!) and the rest I’m putting into my “emergency savings” account. This will kick the account into the above $1,000 range and I’m thrilled. I’ve been putting $100 a week into it since mid-January, plus any additional money I get from clothes I consign, birthday checks, that sort of thing. The goal is to get it to $5,000 by the end of the year (I don’t make a lot of money in my non-profit job so this is harder than it sounds unfortunately, plus I also need to start saving for a new car sigh). When I saw my refund had come through I texted the manfriend and said: “I can pay you back now yay!” Once I pay him back I will be DEBT FREE. I’m anxiously awaiting the next Throwing Money at Our Problems so I can spew my joy into he comments section.

I’m expecting to get over $1,000 back (potentially closer to $2,000? since I paid mucho dinero in student loan interest this year and I’m planning on doing my taxes this weekend/next week). I’m going to use approximately $500 to pay down my CC debt, and then save the rest since I’m losing my job in March. The more I get, the more I’ll pay credit cards but probably not more than $750 or so. We’ll see.

LookUponMyWorks (#2,616)

@polka dots vs stripes Can I asked how much in student loan interest you paid? I haven’t worked it all out yet and I’m kinda holding off because I don’t want to be disappointed. I think I paid something like $2K in loan interest this year…

@LookUponMyWorks At least $4k I think? I just started repayment this year and I’m on IBR, so my payments were only interest for awhile. In an ideal world, I’d get back the full $2,500, but I’m not sure how that whole reimbursement thing works so I’m not counting on it.

ImASadGiraffe (#982)

@polka dots vs stripes It’s a reduction of your taxable income, not a tax credit. So the max deduction is $2,500, but it’s not like you’re lopping that off your tax bill (sorry).

@ImASadGiraffe Yeahhhhh I didn’t think that’d be the case (but a girl can dream!). I’m just going to input my numbers into the tax program I use and see what it spits out at me.

deepomega (#22)

Haha. And I, on the other hand, owe the IRS 5 figures!

highjump (#39)

@deepomega Why? Serious question. Do you not withhold funds from your paycheck? Are you self employed?

deepomega (#22)

@highjump Self employed. I have money set aside for this. It’s just, you know, not fun to write a big check.

chevyvan (#2,956)

LW, why do you need a car in Chicago? Are you moving to the burbs? Do you need a car for your job? I live in Chicago and don’t drive. Lots of people here don’t have a car!

@chevyvan I was going to say the same thing! I own a car in Chicago and right now I really only drive it once a week, just to make sure the battery doesn’t die.

@chevyvan Coming here to say this! Why a car? Just don’t pick an inaccessibly neighborhood. I would say that only 40% of my friends own cars.

@chevyvan Agree, I own a car and it is only necessary because sometimes my husband has to commute out to the suburbs. But we only have one car and it is fine. Save your money, get a place close to a train line, and get an iGo membership!

Dancercise (#94)

I’m going to be getting about $1400 back this year. My plan is to put most of it in savings. I am a boring person.

SterlingCooper05 (#2,529)

@Dancercise Usually the most boring decision is the best one!

cryptolect (#1,135)

@Dancercise I am even more boring: I put my refund into a traditional IRA so that I will get a refund the following year (to put into a traditional IRA so that I will get a refund the following year, etc etc etc).

ATF@twitter (#1,471)

I do something different with mine most every year. Two years ago it went towards a fancy, all expenses included resort vacation with four of my closest friends. Last year it was earmarked for covering the associated costs of being in my brother’s wedding and redecorating the bedroom of the girl I’m a big sister for*.

This year I’m planning on moving in with my boyfriend in the summer. So of the $2450ish I’m getting back, half is going directly into savings and half is just going to chill in my checking account so that I can move more each month into savings than I usually do. I put in $600 (most) every month and I’d like to up that to $800 in the months leading up to the move without feeling like I can’t afford life. Moving is going to be super expensive no matter what, so I’d like as big a cushion in savings as possible.

*They had nothing for a variety of reasons that basically boil down to poverty sucks and is terrifically unfair, especially to kids. So it wasn’t so much of a redecorating as it was buying them basic necessities like a bed/desk/dresser.

highjump (#39)

Like WaityKatie above I try to do my withholding so I don’t get more than a couple hundred back. My federal refund almost exactly covered a plane ticket I had to buy and my ~$100 DC refund went right to the credit card balance. Boring.

WaityKatie (#1,696)

@highjump I actually got one from NY this year, which makes me angry because I hate them but no matter what I do to my withholding, it somehow doesn’t change the amount? Anyone know anything about this mystery? And…I put it all into my “furlough fund.” /sad government employee likely soon to be laid off forever/

Heckyes (#1,162)

I am getting what feels like a million dollars back (actually $2000) so I’m going to spend ~20-30% of it on an enormous purple reading chair and put the rest into savings. I should probably use it to pay off student loans, but it’d be such an insignificant portion that I don’t wanna (also, looking at my student loans gives me anxiety, so I’d rather not).

honey cowl (#1,510)

Timely! I am getting a decent-sized but not 4-figures refund. Can’t decide whether to put it in regular savings or retirement savings. Or (interest-free) CC it. Decisions decisions!

I got $544 back which promptly disappeared into mysterious wedding-related expenses.

Emma Peel (#317)

Based on these comments, throwing money at our problems next month is going to be fun!

–someone who paid off a whole credit card with her $500 refund

minijen (#656)

I have a sizable chunk coming back as a refund, and a surprise bonus for 2012, so I’m doing a little bit of everything: ER fund, house repair savings, new clothes (not a splurge – the few clothes I have are falling apart), vet bills and cc bills. Although – I have debated cutting back on one of these and refinancing my 5.5% mortgage. I’m talking with a broker now to see if it’s worth the trouble.

I got back $1500ish. What I would like to do is go shopping and buy all new clothes because somewhere along the line I became an adult but no one told my wardrobe that. What I should do is throw it at my student loans. What I am doing is keeping it in my savings until I either get a better job or a second job.

bgprincipessa (#699)

@totallyunoriginal “What I would like to do is go shopping and buy all new clothes because somewhere along the line I became an adult but no one told my wardrobe that.” all the time, yes, this, always. You speak my life.

I’m getting about $1600 (grad student credit!) which is my first refund. It’s going into savings, maybe toward a trip to Europe, maybe just sitting there. But also all my shoes are falling apart…. and shoes are expensive. And get worn down.

I’m getting around $1,800 back (federal and state combined). Normally, I would take about $100 or $200 and buy something nice for myself, and then put the rest in savings. This year, however, I’m spending the WHOLE thing to pay for my portion of a vacation to Europe with my boyfriend. I feel a touch guilty for not saving any of it, but this year I reached my emergency savings goal of 3 months of expenses, plus a little bit extra for minor emergencies. I’ll keep reminding myself about that until it’s close enough to our departure date that my excitement surpasses my guilt.

snackcarts (#3,300)

I did my taxes last weekend and am getting back exactly $534, all of which is being pissed away on things I’ve been meaning to do for ages (an oil change, haircut, new phone as mine is on its last legs, etc.) and maybe a new pair of sneakers as I’ve been exercising in Chuck Taylors with holes in the sides for the past few months, which can’t be good for my body.

I’m only getting $84 back; what am I doing wrong?!?

jr (#3,151)

@Jake Reinhardt your not doing anything wrong. unless you have a mortgage or serious deductions you should want your refund to be as low as possible so you maximize your pay throughout the year.

SterlingCooper05 (#2,529)

@Jake Reinhardt Nothing wrong, you paid the right amount throughout the year.

jr (#3,151)

I haven’t done my taxes yet but the refund calculator says I won’t be getting much back so whatever I do get back I will probably put towards student loans.

SterlingCooper05 (#2,529)

I’m putting my $1,100 return towards an emergency fund.

BATS! (#2,770)

I just started a relatively high paying job in the summer after years of student poverty, so I have (i) huge tax deductions from my paycheques, and (ii) a crazy amount of tuition and student loan interest credits. The end result is a high four-figures refund coming my way when I get around to filing. I will probably just add it to my “house downpayment/unemployment contingency fund.” The initial plan was to buy a slightly used car, but I don’t feel that’s necessary, what with car-sharing and bicycles.

julebsorry (#1,572)

@BATS! Just wait until you get a REALLY high-paying job and can no longer deduct student loan interest. That was a weird thing my husband and I faced this year – I had no idea that at a certain household income level, you no longer got that deduction. Oh well, I guess that’s a pretty fancy problem to have, and we’re pretty fortunate if that’s an actual “problem”..

s. dekker (#3,301)

I am getting a 3K refund (thanks student loan interest!) and I’m sticking it into savings when I get it and hopefully get my savings account to around 15K. Thankfully I’m free of any consumer debt at the moment. I use my CC for the points but it’s always paid off as I go.

I am planning on buying a car soon, for which I’m trading in my car (yes I know but I don’t have the time or the energy after work to sell it myself) and giving a 1K-2K down payment. Mine will need expensive maintenance soon and I depend on it for work (what I do involves driving my own vehicle).

I also have a 17K student loan that I wanted to pay off (out of 100K debt). I am waiting on that because I am afraid to be without my savings cushion. Technically I could pay it off soon but I’m now wondering if I shouldn’t save up more before I do that, so I don’t wipe my savings. I’m not comfortable now with only having 1K in there because that alone is my monthly student loan payment, and I like having enough to live on for a while just in case.

My goal after grad school was to live on only a small portion of my salary and pay off half my loans (~50K) ASAP, but I am now wondering how smart that is. I want to build up a savings cushion first, I think, before I give away a huge chunk of money like that. At the least, I want to pay off some portion to I can reduce my payments and therefore be free to think about buying a house (which right now I don’t feel comfortable with because I don’t want to take on more debt on top of student loans).

chic noir (#713)

@sdekker I think, for someone in your position 15k sounds good. If you have private student loans, you don’t have as many repayment options in case of ” hard times”. Better to cover yourself first.

I’m only getting a couple hundred back from federal and state combined; I’m going to use it to get a tattoo I’ve had planned for over a year. No regrets!

@anachronistique I always say that I’m going to use my refunds for more tattoos. Maybe this year I will. Maybe this year.

DON (#706)

No one else is buying a boat???

Changeling (#126)

My $300 state refund (along with $300 from my just-in-case savings account) went to car repairs, blah. So some of my $970 federal refund will probably go into savings to make up for that, and then general life expenses and bills since work has been slow lately.
But I’m also thinking of opening an IRA? The info on my bank’s website says that Roth IRAs might be better for people who expect to be in a higher tax bracket when they retire, which I’m not sure I understand, but doesn’t sound like it will be me.

kellyography (#250)

Let’s talk about how I owe $1700 in taxes this year, the first year I have ever owed any, ever. Every job I had last year withheld something, except one, the taxes on which shouldn’t be 1/4 what I earned for that job – did I do something wrong?

bgprincipessa (#699)

@kellyography Hm, I don’t know much about your situation OR about taxes, to be honest, but I will give you my suggestion on what I think happened based on my own past experiences: each job withheld at the rate based on what you were making at that particular job, and didn’t withhold based on your other jobs. i.e., the jobs are blind to each other – and your total amount should’ve been taxed at a higher rate than the divided up amounts. [ugh, I'm really sorry if this is wrong and please don't attack me anyone, but that is what happened to me last year]

RVA_TXN (#1,461)

I’m getting about $850 (state and federal). I will use $500 to get my emergency savings fund up to $1,000 and then put the rest towards my 96K miles scheduled maintenance for my car and dental work… boring adult stuff, blah!

ImASadGiraffe (#982)

My refund ($1600-ish) this year went to savings, I have a potential move coming up this year (waiting to hear about the job). I adjusted my withholding already using the IRS calculator so I will get a lot less back next year, but yay for bigger paychecks.

linda (#3,256)

I’ll be getting about $1000 back and most of it will go toward my credit card, since I already have an emergency fund. But first, I’m planning to buy my Bonnaroo ticket! I just can’t help but do something fun every time my return rolls around.

Lily Rowan (#70)

I have already told the whole internet plus Mike Dang this, but I got a crapload of money back and paid off all of my credit card debt for the first time in ever, which feels like magic.

chic noir (#713)

@Lily Rowan congrats.

CubeRootOfPi (#1,098)

Spent a little less than half on items that I’ve wanted/needed (e.g. craft project items, various items that need to be replaced). The rest went to the emergency fund.

chic noir (#713)

@CubeRootOfPi and that my dear, IMHO, is the best way to treat your refund saveings/needs/wants. It’s all about balance my dear balance.

andnowlights (#2,902)

Getting $1150 back and THAT, my friends, will round out our 3 month (all expenses covered) emergency fund. Finally.

Once it’s deposited, then we’re going to try and pay off one of my husband’s student loans, even though he’s still in school. It’s accruing interest and that will not stand with me, so since we have an emergency fund, we’re just going to throw money at the problem til the end of the year (we basically switched steps two and three in Dave Ramsey).

chic noir (#713)

Well I usually come up with a 50/25/25 or 50/50 plan with my refund. Meaning half or a quarter saved and half going to pay off credit card or vacation.

This year, half is going to pay off and close two credit cards( pluck a credit score drop, I’m paying them off and closing them up). One quarter to be saved and the other quarter to be spent on whatever I want. Probably a mini vacation or more sale silk shirts and sale flats from J.Crew.

megsy (#1,565)

I am so close to paying off my visa that every cent is going directly from my chequing to that card. Then I look forward to never paying CC interest again. And getting a card from Mike Dang.

Stina (#686)

We usually pay in a teeny amount for the past couple of years. No mortgage, no student loans, no kids. But it bothers me not a bit because hey, when I got big returns I had very little money. And now I have much more money.

I just wish they would take out our property taxes a little bit each paycheck. I never seem to be able to remember that’s coming.

Mistress Sparrow (#2,660)

The Billfold should do a review of all the online tax filing programs, and how much bang you get for your buck. That would be suuuper helpful!

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