How to spend $2,733, an average tax refund

Your Money

March 18, 2007|By Gregory Karp | Gregory Karp,Morning Call

For many people, the biggest spending event of the year is not holiday shopping, a vacation trip or back-to-school buying. It's the arrival of the tax refund and deciding what to do with it.

A tax refund marks a fantastic once-a-year opportunity for most Americans to spend their money smarter.

Granted, personal-finance gurus work themselves into a lather advising people that tax refunds are evil - that you're giving Uncle Sam an interest-free loan, and that you should rush to change your W-4 withholding form so it never happens again.

That's fine advice, but a bit of an overreaction because it doesn't matter much for the average taxpayer who receives a refund.

Interest-free loan

It's true you're giving the government an interest-free loan, but it amounts to losing about $18 in interest over the year. That assumes the average early season refund of $2,733 spread over 12 months, earning a typical 1.45 percent in interest.

Given that losing out on $18 is not financially devastating, look at the bright side. A tax refund gives you a chunk of money that you can think about using wisely. That's easier to do with a lump sum than it is with an extra $7.49 a day, which is what the average refund amounts to.

So here are suggestions on how to spend an average refund of $2,733:

Emergency fund: $1,000

Having a rainy-day fund is the most fundamental financial move, and you've no doubt heard how important it is. But what you might not realize is how it saves you money.

With a cash cushion, you can feel comfortable saying no when a salesperson offers you an extended warranty because you have a fund to pay for repairs.

You can call your insurance agent and raise your deductibles on home and auto insurance, which will save you money on premiums. And an emergency fund will give you peace of mind, which any financially stressed-out person will tell you has a real dollar value.

If you already have an emergency fund of three to six months of bare-bones expenses, roll the money into the next suggestion.

Debt: $1,000

This is where you'll get the biggest bang for your refund buck. There are different schools of thought on how to prioritize paying off debt.

Math says you should pay off the highest interest-rate debt first. But most people might be better off paying down the smallest debt first.

That way, you can finish a few debts quickly, which feels like an accomplishment. It's like losing a few pounds during the first week of a diet; it gives you incentive to go on.

Absent non-mortgage debt, including car loans and student loans, eyeball savings accounts - for retirement (a Roth individual retirement account, if you qualify) and the children's college.

Start car fund

An alternative is to start a car fund. You will replace your car - it's just a matter of when.

Placing $1,000 in a separate bank account and setting up an automatic deposit of, say, $200 a month puts you on the path toward buying your next car with cash, or at least limiting the amount borrowed.

Remember, spending and saving are close cousins. Saving is just deciding to spend later, rather than now.

Blow-it money, $733

Nobody needs to advise you on how to put the "fun" in "refund." Most people have a want-list a mile long. And some won't exactly blow the money, spending it on a new washing machine or lawn mower.

But, if you have a few bucks unaccounted for, consider the following ideas, which are likely to save you more than the $18 in interest your tax refund would have earned.

Useful tools

A subscription to Consumer Reports online (, $26, allows you to easily research products before you buy; financial software, such as Quicken or Microsoft Money, basic versions for about $30, or budgeting software by Mvelopes (, roughly $8 to $13 a month.

You also may want to consider a programmable thermostat to help adjust heating and cooling, $40 to $100; a few hours of professional financial planning from a fee-only planner (search for planners at or, $200 to $500.

Of course, you know best how to spend your refund smarter. And one glaring omission from this list is giving money to a charity you care about.

Spend it

The point is to avoid depositing refund money in a general checking account earmarked for nothing in particular.

That's what more than a quarter of people will do, according to their responses in a survey sponsored by the National Retail Federation.

Instead, spend the money on purpose, on things you'll feel good about, on things that put you in a better financial position by tax-refund time next year.

Gregory Karp writes for The Morning Call, in Allentown, Pa.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.