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How Americans Plan to Spend Their Tax Refunds in 2018

By Matthew Frankel, CFP® - Nov 30, 2017 at 6:32AM

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How do you plan to use yours?

Sixty-two percent of Americans expect to receive a tax refund from either the IRS or their state, according to a recent survey by Credit Karma Tax. Of this group, more than half already know how they're going to spend it.

Here's a breakdown of how Americans plan to use the tax refunds they'll get in 2018, and the difference between the good and bad ways to spend an influx of cash.

US tax refund check with money laid out on top of it.

Image Source: Getty Images.

How Americans plan to use their tax refunds in 2018

According to data obtained in a recent Credit Karma Tax survey of more than 2,000 U.S. adults, here are the top 10 ways Americans are planning to spend their tax refunds in 2018:

Type of Spending

% of Respondents

Put the money in a bank account or rainy-day fund

20%

Pay off credit card debt

18%

Pay off other debt

16%

Use it toward a vacation, travel, or major event (like a wedding)

11%

Save it for a major purchase (home, car, boat, etc.)

10%

Buy something for themselves

6%

Pay off student loan debt

6%

Pay off medical debt

3%

Put the money in a family member's bank account

3%

Buy something for a spouse or significant other

2%

Data Source: Credit Karma Tax.

Most people are planning to use their refund wisely

The good news is that most of the survey respondents plan to use their tax refund to bolster their savings or get out of debt. In all, two-thirds of responses can be classified into one of these two categories.

In (approximate) order, the most constructive ways to use an influx of cash, like a tax refund, are to:

  • Establish or contribute to an emergency fund. These first two could be interchangeable, depending on the state of your emergency savings and severity of your debt situation.
  • Pay off high-interest debt, such as credit cards. I would also put debts that are past-due, or must be paid in full to avoid collection activity into this category.
  • Invest or save the money for the future.
  • Pay off lower-interest debt, such as mortgages, auto loans, and credit cards.

Some people should rethink their plans

To be fair, some of responses given by the 33% of people who don't plan to save their tax refund or pay down debt could still be good ways to spend the money. For example, saving for a down payment on a home could be a smart long-term financial move.

However, some responses are more difficult to justify, such as the 11% of people who plan to spend their refund on vacations or travel and the 6% who plan to buy something for themselves.

Here's why these people should rethink their decisions. A tax refund isn't simply a bonus windfall of cash. It's money that you earned, and that was withheld from your paychecks throughout the year. Effectively, your tax refund is more like a paycheck you get from your job, as opposed to just being "extra money."

Would you take your paycheck and splurge on a major purchase or use the entire amount on a vacation? Probably not. So why would you do that with other money that you worked hard for? Spending your entire tax refund (the average American received $2,763 back last year) is simply not a wise financial decision.

How should you spend your tax refund in 2018?

The smartest thing you can do with your tax refund is to tackle your most urgent financial issues first. If you don't have any savings for emergencies, that should be a high priority. If you have credit card debt at a high interest rate, that's also important to knock out.

If you're like most Americans, you use most of the money you earn from working for things you need or to improve your overall financial well-being. During the 2018 tax season, keep in mind that your tax refund is money you earned -- not free money -- and should be treated as such.

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