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The best way to spend your 2017 tax refund
February, 07th 2017

Most people will agree that the best part of filing taxes is getting a refund check.

The average tax refund is around $2,800 to $3,000, which is a substantial influx of cash that can be used in a variety of ways. The issue is that many Americans spend impulsively. In a recent survey conducted by tax-prep company Liberty Tax Service, 24% of respondents said they spent last year’s refund in a matter of days. A little more than half spent it in just a few weeks.

According to Mary Beth Storjohann, CFP and Founder of Workable Wealth, a financial planning site, the first step to making wise financial decisions is to create a plan before the money is deposited into your bank account.

“Strategic financial planning doesn’t sound sexy,” says Storjohann. “But it will keep you from spending impulsively.”

To make the most of your refund, Storjohann suggests applying the so-called 50, 30, 20 Rule to spending your refund.

Use 50% to pay off debts

If you have debt – like an overdue credit card balance – spend 50% of your refund to pay it down. Be sure to choose your debts with the highest interest so your money makes the biggest impact possible. Sure, you might not pay off all of your debts, but it could make a dent, which will relieve some financial stress.

Save 30%

The Liberty Tax Service survey found that 39% of respondents put their tax refund into a savings account. Ideally, you should have an emergency fund that can cover your expenses for 3 to 6 months. This is easier said than done, so use part of your refund to give yourself a little cushion. If you already have money put away for a rainy day, Storjohann suggests saving for the long term. “Put away money for retirement by contributing to your 401(k) or IRA,” she told Yahoo Finance. “Make sure you are investing in your future, not saving for an upcoming trip or purchase.”

Take 20% and splurge!

That’s right, use the leftover money to buy yourself something nice, book a trip, or take the family out to dinner. While being financially savvy means making smart choices, it doesn’t have to be completely joyless. “Splurging on something allows you to make financially sound decisions without feeling like you’re depriving yourself,” says Storjohann.

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