Expecting a Tax Refund? 4 Reasons You Shouldn't Just Blow It

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  • Getting a tax refund isn't ideal, as that's money you should've had access to during the year.
  • Consider paying off some debt with your refund, as that will improve your credit score and reduce how much you spend on bills every month.
  • You might also start an emergency fund with your tax refund.

Spend a small percentage on something fun, though.

It's tax season, and while the act of filing taxes is perhaps not anyone's favorite task, it is necessary if you want to avoid getting in trouble with the IRS. Besides, you might be getting a tax refund. CBS News reported last year that for tax year 2021, three-quarters of Americans were entitled to a refund, so the odds are likely in your favor.

I'd argue that getting a refund actually isn't ideal, and it's better to break even, as that way, you have access to all of your own money during the year so you can use it to pay bills and improve your life. Remember, a tax refund is your money, and the government held onto it for a period of time and is returning it to you -- without interest. Think of how you would have spent that money had it been part of your paychecks for the last year.

But if you are getting a refund this year, you likely already have big plans for that money, and may even be thinking of spending it all on something you wouldn't have bought otherwise. This is a bad idea, and here's why.

1. It could improve your credit

Last year, the average refund amount was over $3,000. As of this writing, the average refund amount for this year is a hair under $2,000, but it's still early. This is a nice chunk of money, and one great thing you could do with it is pay down some high-interest debt. I realize this isn't sexy, but it would improve your credit score by reducing your credit utilization ratio -- and having a higher credit score can help you in all sorts of ways. If you're hoping to buy a house or maybe take out a loan to start your own small business, you'll score a lower interest rate with better credit, for example.

2. It could reduce your monthly bills

In addition to improving your credit score, paying off debt with your tax refund will also reduce the amount of money you spend every month on your bills. I had many years of living paycheck to paycheck, and one of the best things about getting out of debt was watching my monthly bills decrease as I paid things off. If you're like I was, paying your bills on payday and feeling very grateful to be left with even a little money cushion in your checking account (if you're lucky), do yourself a favor and consider paying off some debt.

3. It could give you more peace of mind

Maybe you're not carrying high-interest debt, but your finances are lacking in another way. Do you have a solid emergency fund? Consider making your tax refund the first deposit into a brand-new high-yield savings account. It's possible your tax refund won't be enough to cover at least three months' worth of bills, but it could certainly be a start on that path. An emergency fund is a wonderful thing to have, as it can help you stay out of debt when you have an unplanned bill or even a more serious issue, like getting laid off from your job.

4. It could make your life materially better

If you have an emergency fund and no high-interest debt, you might be thinking you're in the clear to blow your tax refund on something fun. But wait just a moment. How's your refrigerator holding up? Or your clothes dryer? If a large appliance has been limping along until you have the cash to replace it, now might be a good time. The same goes for a piece of large furniture. If your couch has seen better days, make your life better by spending some of your refund on a new one.

Spend a little on something fun

Maybe by now you're mad at me for suggesting that you pay off debt with your tax refund or save it for the future. I'm not a complete killjoy, though. It might be nice to take a small percentage of your refund (maybe 5%-10%) and spend it on something fun. If you're getting back, say, $2,500, and decide to spend 10% of it, consider taking a little mini-vacation to a nearby city you've been wanting to check out. That $250 might pay for a night in a hotel and tickets to a cool art museum.

Your tax refund is money you earned and ideally should have been paid during the year, rather than getting it back during tax season. For this reason, it pays to think of it that way, rather than as "bonus free money." To that end, make a solid plan for how to spend it in such a way that improves your life and your financial future.

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