receiving tax refund notification on phone

With the April 15th tax deadline just passed, I know many of you are now eagerly awaiting a federal tax refund.

And it could be a big chunk of money. The average federal refund this year is about $3,500, which is more than 10% higher than the average for the previous year.

So what is your plan for your tax refund?

Yes, I said plan. You’d better have one, my friend.  With all the uncertainty in our economy right now, and the painful spike in gas prices recently, any tax refund is an opportunity to work on your financial security. But that takes a plan. Otherwise, you and I both know that when your refund lands in your checking account it will just get spent, possibly on wants and not just the needs that are so important right now.

I am not going to tell you exactly what you should do with your tax refund because every household is different. But I am going to ask you to first focus on needs. These are the expenses that you not only must make, but that also bring some peace of mind. And I want you to be strategic: think about expenses you anticipate having in the next year. For instance, your home insurance premium might not be due for another eight months, but if you know it’s a stress point, then make yourself a promise today that you are going to use some or all of your refund to help pay the premium.

Here are some good uses for any tax refund, to help you plan wisely:

  • Reduce the bite of rising prices. I 100% understand how basic groceries and keeping the gas tank full have become much more expensive. As far as I am concerned, using a tax refund to absorb these higher essential costs is a great use. But just promise me you will be careful to keep your grocery spending in line by avoiding too many splurge purchases. You want that refund money to help you for months, not just a few weeks.
  • Give your car a great maintenance check. I have to tell you, one of the best financial moves you can make right now is to avoid needing a new car. Car prices, even used car prices, have gone from expensive to crazy expensive, and car loan rates keep trending higher. So the smart move is to keep the car you have as long as you can. Spending $1,000, $2,000 or more to replace worn parts is going to save you money in the long run if it means you can delay having to buy another car for a few more years.
  • Increase Your Emergency Savings. This is where a tax refund can deliver invaluable peace of mind.
  • Start Your MOOP Savings Account. I recently talked to you about how even when you have health insurance, the deductible and co-pays can add up to thousands of dollars a year you are on the hook for (you can read that article here). It’s so important to know what your maximum out-of-pocket (MOOP) cost can be, and then to make sure you have that set aside, ready to pay for health expenses. That is going to reduce the odds that you will need to use a credit card to cover those costs, which can end up ballooning if you can’t pay it off quickly.
  • Make your 2026 Roth IRA contribution. If your current cash flow is enough to cover your expenses and you’ve got ample savings tucked away, using your tax refund to build even more retirement security is a very smart move. Investing $3,500 today and earning a conservative 5% or so over 20 years will leave you with more than $9,000.

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    Categories: Budgeting, Debt, Emergency Funds, Health Insurance, Roth Accounts, Saving