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What Do I Do With My Tax Refund?

Last year, the IRS sent out more than $355 billion in tax refunds, with the average refund clocking in at almost $2,800.1 With that kind of money burning a hole in your pocket, it would be so easy to blow it all on a gadget, a vacation or a new spring wardrobe.

Isn’t that how most people spend their tax refund?

It might surprise you to learn that 54% of Americans said they planned to put part of their tax refunds into savings last year, according to a survey by the National Retail Foundation.2 That’s a way more responsible option than spending it all on a late-night online shopping spree. (Resist those impulse purchases!)

But while we’re all for saving your refund for a rainy day, you shouldn’t start building a fully funded emergency fund if you have any debt. You should throw your refund at your debt instead.

Taxes shouldn’t be this complicated. Connect with a RamseyTrusted tax advisor.

About a third of folks from the National Retail Foundation’s survey planned to use at least part of their tax refund to pay off debt.3 But we ran some numbers to find out what would happen if you got gazelle intense and used your entire refund to pay down your debt. You might be surprised by how much you could actually save in interest and payments with this one simple step.

Crush Debt Faster With Your Tax Refund

Student Loans

The average student loan balance is nearly $39,000.4 So, let’s say your balance is $39,000 at a 6% interest rate on a 10-year loan. With a monthly payment of $430, you’ll shell out about $52,000 in principal and interest.

But let’s say you put your $2,800 tax refund toward your student loan balance. Using our student loan payoff calculator, you’ll see you can pay off your loan a year earlier and save about $2,160 in interest.

Now, let’s take things a step further. Getting a $2,800 tax refund doesn’t mean you hit the jackpot. It’s simply the government returning your money that you’ve been overpaying them—money you could have been using all year long to pay extra on your debt. Your goal should be to have a tax refund as close to zero as possible so you’ll have more money in your paycheck.

Don’t wait until next year to get your money back. Work with a tax advisor or your payroll department to adjust your withholding today so you can bring home an extra $230 a month ($2,800/12), starting with your next paycheck!

Then you can use that $230 to pay extra each month on the remaining balance of your student loan debt. With this method, you’ll pay your loan off in a little over five years instead of 10. And you’ll save an additional $4,700 in interest!

That’s how you put a tax refund to work! Here’s how that same scenario can work on your other debts:

Credit Cards

Households with debt currently owe an average of more than $14,800 in credit card debt.5,6,7 Yikes! If you paid only the minimum payment of 3% of the balance, and with a 15% interest rate, it’ll take you 19 years to pay that off. But if you chuck that $2,800 tax refund at the balance when you get your refund and add $230 to your monthly payment after adjusting your withholding, you’ll knock that sucker out in just a few years and save yourself thousands of dollars in interest!

Car Loans

The latest research shows that the average used car loan is almost $26,000 at a nearly 8% interest rate.8 Most people finance their cars for five years, although the average term is creeping toward six. With your one-time $2,800 payment followed by your increased monthly payments of $230, you’ll pay off your wheels two years sooner and save over $3,000 in interest!

Home Loan

As home prices continue to rise around the country, the average mortgage balance has jumped to over $208,000.9 Let’s assume you have a 15-year mortgage with a 5% interest rate. Using our mortgage payoff calculator, you can see that with your tax refund and increased monthly payment of $230 (from your newly adjusted withholding), you’ll pay off your home nearly three years early and save more than $16,000 in interest!

Roll Your Tax Refund Into Retirement

As long as you have $1,000 in a starter emergency fund, you should use your tax refund to pay down your debt. But if you’re out of debt and have three to six months of expenses saved for your fully funded emergency fund, use our investment calculator to see how your tax refund can do great things for your retirement account.

With an initial investment of your $2,800 tax refund followed by monthly contributions of the $230 you gained after adjusting your withholding, you could add nearly $720,000 to your nest egg over 30 years! That’s just $82,800 of contributions but more than $634,000 of growth. This is one simple way to catch up if you’re feeling behind on your retirement savings goals.

Maximize Your Refund With an Expert Tax Pro

Crushing debt like we’ve talked about above is only possible if you make sure Uncle Sam pays you everything he owes. An experienced tax professional will spot deductions and credits you may not know about, and they’ll make sure you get the largest refund possible. Then, your tax pro will help you adjust your tax withholding so you aren’t giving the government a tax-free loan each year. It’s time you put your money to work paying off debt or investing for a secure retirement.

We can put you in touch with a RamseyTrusted tax pro in your area so you can get going on your debt snowball or retirement fund as soon as possible. Find a tax advisor near you today!

If you’re confident you can handle your own taxes and just want easy-to-use tax software (without the big sticker price), check out Ramsey SmartTax—it makes filing your taxes easy and affordable.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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