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Should You Spend or Save Your Tax Refund?

By Selena Maranjian – Apr 14, 2017 at 1:07PM

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It's tempting to view a tax refund as a windfall from Uncle Sam, but it's simply the return of your own money, and you should save or spend it in the most productive way possible. Here are some good ideas.

A big tax refund isn't quite as wonderful as it may seem, because it generally means you've had too much withheld from your earnings for taxes, essentially giving Uncle Sam an interest-free loan. The refund dollars are not a windfall -- it's your own money, coming back to you.

Still, whether it's big or small, what should you do with the tax refund you receive -- should you spend it, or save it? Here are some questions to ask yourself to help you decide.

Someone holding a small blackboard on which is written SAVE and SPEND -- with spend crossd out.

Image source: Getty Images.

Are you carrying high-interest-rate debt?

If you're saddled with credit card debt or any other debt that carries steep interest rates, paying it off should be a priority. You're not alone if you have such debt: According to the Federal Reserve Board of New York, between the fourth quarter of 2015 and the fourth quarter of 2016, total household debt in America rose 2%, to $12.6 trillion. The credit card debt component of that rose faster, up 6% to $779 billion. You might enjoy whatever you spend a $1,000 tax refund on, but if by buying it you're leaving $1,000 in your balance due and are being charged 20% annually on it, that purchase can cost you $250 per year on top of its original cost. Even putting your tax refund toward your mortgage can be effective, shortening the life of that loan a bit and saving you future interest payments.

Is the money likely to be needed soon?

Before spending your tax refund, think about whether you have some significant expenses coming up, and if you can easily pay for them. If not, that refund could come in quite handy. You might, for example, need to get a new roof in the near future, or maybe you foresee a costly car repair around the corner. Spend a little time thinking of any upcoming expenses you have so you don't end up financially pinched.

Hand coming up out of the water as if calling for help

Image source: Pixabay.

Do you have an emergency fund?

Along similar lines, be sure you have a fully stocked emergency fund before you spend any tax refund money. You should aim to have between about six and nine months' worth of living expenses socked away, including just about everything -- housing, food, utilities, taxes, insurance, transportation, and so on. The money should be relatively accessible, too -- and not in an investment you can't cash out without facing a hefty penalty. Remember that life throws lots of curve balls our way, and we need to be financially nimble and able to deal with an unexpected job loss, costly medical issue, or a suddenly needed new transmission.

Are your retirement savings on track?

Assess how you're doing in your saving and investing for retirement. According to a survey by the folks at Experian and Get Rich Slowly, a whopping 71% of Americans think they have insufficient retirement savings -- and per a GoBankingRates survey, 33% have no retirement savings at all. So, if you feel behind, know you're far from alone -- and take comfort in the fact that your tax refund can be a welcome infusion into a retirement account.

In fact, it can be so powerful that even if you are on track with your retirement saving, you might want to devote your refund to that cause anyway. Many purchases such as cars or clothing will depreciate over time, but an investment in, say, stocks, can appreciate over many years. Here's how several different sums, invested once and left to grow, can become worth a lot over time:

Growing at 8% for

$2,000 invested

$3,000 invested

$4,000 invested

10 years




15 years




20 years




25 years




Calculations by author.

The table might help you rethink some possible purchases. If, for example, you're salivating over a fancy $2,000 TV, note that instead of having a $2,000 TV now, you might instead enjoy more than $9,000 in retirement money in 20 years. If your refund is $4,000 and you're 25 years from retirement, you could end up with $27,000 more, which will be a helpful sum when you're no longer working. Heck, apply a bunch of years' tax returns to retirement, and you may be able to retire early!

Close-up of a man's hands counting dollar notes

Image source: Getty Images.

When spending your tax refund makes sense

You might be getting the impression that it's never smart to spend that tax refund. That's not the case. If you have your financial ducks in a row -- if you're not in debt, have an emergency fund, have ample retirement savings, and so on, then go ahead and spend that refund!

Here are a few possible things to spend it on:

  • Experiences: Studies have shown that you'll get more enduring happiness by spending money on experiences than on material things. So, consider traveling, or taking a course, or learning to hang-glide, or going to a concert or to some fancy restaurants.

  • Education: The business and employment world is changing faster than ever, with new industries emerging while some existing ones falter. Spending your tax refund on a course or two, or a new professional certification, might help you stay employed, or get a better job, or simply be more marketable should you lose your current job. Learning a new language can be a boon, too.

  • Refurbishment: Spend your tax refund making long-needed repairs to your home, or spiffing it up with some remodeling or new furnishings. That can make your home more delightful to spend time in, and it might make it a little more valuable when it comes time to sell it, as well.

  • Health: If you're not in the kind of shape you want to be in, you might use your tax refund to pay for a gym membership, or sessions with a physical trainer, or perhaps on some home gym equipment.

  • Charity: If you're not in debt, you have an emergency fund, and you have ample retirement savings, there's a good chance your life is in pretty good shape. Consider sharing some or all of your tax refund with those whose lives are much more precarious. You might contribute to a non-profit that's fighting poverty or hunger, or one that's delivering aid to troubled areas.

Whether you save or spend your tax refund, do so in a mindful way, having given thought to your decision. Make effective use of those hard-earned dollars, because they are your hard-earned dollars and not a windfall from the government.

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