Tax Refund: Will You Save It, Pay Off Debt, Invest It, Or Waste It?

I_want_youAs we enter tax season, there are some relevant questions we should ask ourselves about our intentions concerning how we use our tax refund. If any of you are like I was, before I became the Enemy of Debt, you’ve probably spent a few tax returns before the ink even dried on the paper.

Now most “good” financial advisers will tell you to change your withholding so that you are not giving the Government an interest free loan each year, but also to give yourself more of your own money each month.

I actually believe the same thing, but have to admit that we always get a return no matter what we change. Some of it is that I work for tips and it’s hard to know a head of time, how much I will make—in order to figure out the correct amount to withhold. I need to sit down and spend the time necessary to figure it out. It sure would help me reach my savings goal for 2010! (I just talked myself into it.)

So if you are like me and have been lazy about actually sitting down to figure this out, it IS important that you DO SIT DOWN, and consider where the money will go when you do get it. For years, we received our return only to watch it vanish (literally) before our eyes. That is no way to take advantage of getting a large amount of money all at once, just ask the majority of lottery winners who wind up just as poor or worse than they were.

In both 2008, and 2009, we used practically ALL of our returns to pay down debt, and BOY IS THAT FUN! Don’t believe me—try it!! IMPORTANT NOTE: If you plan to run that debt right back up again it’s really not all that fun, because all you are doing is paying it down, to begin the cycle of spending it all over again.

Save it for good! Pay off debt for good! Invest it for good! Waste it NEVER!


Do you have an emergency fund? If you don’t, this would be the PERFECT opportunity to really change your situation for good. Ever heard someone claim they are not able to save an emergency fund? I have, but I bet they get a nice size check from the Government each year. Are you that person?

For some reason people view their tax return as EXTRA money, when really it is a part of their annual income to start with. It’s not extra! It also seems people view spending their income tax return as fun, and well, how fun is it to save it? It’s a lot of fun if you have your priorities in order, and know what that emergency fund will do for you and your family some time in the future.

Ever get sick of the same ol’ same ol’? Consider for a moment how great it would feel to break the cycle of debt and living paycheck to paycheck. Bye bye crisis living, hello responsibility and financial preparedness. I can tell you from experience that it is SUPER AWESOME! So PLEASE…save your tax return by putting your money in a place where it will be the next time you have an emergency.

If you have debt, SAVE at least $1,000 and use the rest of your return to pay off debt! If you don’t have debt save at least 3 months of your expenses. Your emergency fund is the first step of your journey to financial freedom.


Has debt been the center of your financial life for as long as you can remember? Don’t put up with that anymore! Say no to cyclical slavery, and decide that you deserve more for yourself. Get rid of that hope shattering anchor RIGHT NOW by using the debt snowball method! Do not wait until next year, stop making excuses. You owe it to yourself to change course, and unless you love struggling financially or giving all of your hard earned money to the big banks—YOU MUST DO IT NOW!!

Debt keeps you from really enjoying life! You may think you are enjoying life because you have bought a bunch of fancy high dollar possessions, but that is not enjoyment folks. Material possessions will NEVER make you happy, nor will they keep you content. You will always have something else on your list of items to buy that you supposedly “need”.

What you need is discipline. What you need is to start delaying pleasure. What you need is a plan that doesn’t involve thoughtless spending. There are consequences to your actions and the consequences will hit you the hardest when your body tells you at retirement that you need to slow down, but can’t because you have all this debt to pay off. PAY IT OFF NOW!

Do it now when you are physically and emotionally ready for the challenge. Stop allowing others to become rich off of your hard work. There’s absolutely NO EXCUSE for accepting that as a way to live. The Government will NOT save you, no matter how much they claim to try.


Now I almost didn’t add this part because I figured if you have the discipline to save an emergency fund and be debt free, you are probably already investing your money. However, I know there are some of you out there that are in that situation and need a gentle nudge.

Pretend you didn’t get a tax refund and invest all of it. Better yet, act like you owed money and pay yourself that amount, the point is to get started now. Keep the ball rolling by saving at least 5% of your income each month for retirement. It’s just a start, but at least it’s a good one?

Do you keep up with the Government at all? I do, which is why I am not counting on my social security check when I retire. Nope, I am going to already be ready for that day by taking the proper actions NOW. Wouldn’t it be nice to be able to donate ALL of your social security checks if you do in fact see one? That’s what I plan to do. I do not need Uncle Sam to hold my hand because I have a plan—and you can have one too. Get started today!


For goodness sake…DON’T WASTE IT! Give yourself a head start for 2010 by cashing in on some financial security and stability. I will just be honest here. If you waste your tax return you have no reason to believe that 2010 will be any different than any other year. Want to know why? It might be a bit hard for you to swallow, but the truth of the matter is that you will have chosen your priorities. To me that means that you care more about stuff, than you do about saving for emergencies, paying off your debt, investing in your future, and dare I say your family?

Yeah I said it. Don’t be shocked, this is the place where YOUR BEHAVIOR MEETS REALITY!

Let’s take a moment to think of a tragic circumstance. It can happen to any of us, but let’s say you pass away (God forbid) on April 16th, right after blowing your families tax return on stuff. You don’t have any savings. CORRECTION! Your family has no savings, lots of debt, no retirement, but hey, they have a lot of worthless stuff laying around. That stuff will make everything all right I guess. PLEASE…wake up.

Your family would already be having a hard time mourning your loss, don’t force them to pay for it too. If anything, your family is the very reason you need to make different decisions in 2010. Think long and hard about how you spend your tax return this year. That’s all I am saying.

Make the right decision for you and your family this year by not wasting your tax return!

About Brad Chaffee

42 Responses to “Tax Refund: Will You Save It, Pay Off Debt, Invest It, Or Waste It?”

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  1. Ken says:

    We will use 80% of it to pay down debt and 20% for something fun…maybe plan a short vacation.

    • Brad Chaffee says:

      Ken, that’s a lot better than Brian’s philosophy of spending 50% and paying off debt with the other 50%. I know we are really weird but using 100% was totally worth it. Like I told Brian, we are debt free now because of it. πŸ™‚

      Good luck! πŸ˜€

      • Brian says:

        Sorry. I’m not sure if it’s better. It’s different. There are many ways to handle personal finance, and everybody is in different situations.

    • Only 20% for fun? That is honorable. I’m thinking the bigger the refund the more I need to figure out how NOT to get a refund.

      In the past, I’ve used at least 50% of any refund to pay down mortgage debt, and the rest in savings. I recognize that the refund isn’t free money, it’s my money!

  2. Bucksome says:

    We plan our withholding pretty well so it ‘s a toss-up whether we’ll pay a couple hundred dollars or get back a couple hundred.

    However, I commit to putting any refund towards my debt snowball. Thanks for the reminder!

    • Brad Chaffee says:

      I need some lessons from you then Bucksome. I have yet to be able to get it right. (I admit I could be a little more aggressive in my attempt though.) πŸ˜€

      Good plan and have fun saying goodbye to the debt you will be knocking out.

  3. We try to aim for a very minimal tax refund every year, but sometimes it just slips through the cracks and we end up with a big check.

    Whenever we get an unexpected windfall, I just put it away for 10 days and don’t even think about it. It lets the euphoria wear off a bit. πŸ™‚

    We’ll then use our list of goals for 2010 to determine the best use of the cash–probably an even mixture of savings and paying down debt.

    • Brad Chaffee says:

      Also a good plan Wojciech! Putting it aside and thinking on it almost guarantees that you will use it more wisely—great job! I like the pat about looking at your list of goals for the year too. Choosing your priorities are important and something far too many people do wisely.

  4. Oregonsun says:

    We will be saving it to help with paying property taxes, homeowners insurance, etc. We are aiming to save additionally so that maybe it can just be left alone. Keep your fingers crossed!

  5. shannon lutz says:

    I am going to use it to pay down my car loan, and I decided not to eat out this year in an effort to use the $ i save to pay off the loan by year’s end.

    • Brad Chaffee says:

      Very good plan Shannon! Getting rid of our car payment was one of the most helpful things we did for ourselves. With two paid for cars we are enjoying the extra money we have each month to save. I hope you get that sucker paid down super quickly! Not eating out at all would be hard but if you’re determined, you can accomplish it! Good luck doing it, and I am rooting for you to succeed! πŸ™‚

  6. Peter says:

    I adjusted my withholding last year, so I didn’t end up getting a refund. I ended up owing the government about $100 total – so I was pretty close to being right on. Feels nice not giving the gov’t a free loan!

  7. Money Funk says:

    I just remembered I took extra out of my paycheck. Cool. A bit more back then I calculated. I am thinking about paying back one of those personal loans I just took out. One less payment… Or maybe… I will see if I can erradicated my car loan. With my refund check… (I get a good amount back because of the kids) + the money still left from the personal loan… I may just beable to erradicate that loan… Hmmm… Thanks Brad. I needed that brain exercise. πŸ˜‰

  8. Brian Drolet says:

    Hi, I think you are forgetting an important part.

    Spent it!
    I’ve always believed that spending part of “found money” is a great thing. Usually spending 50% and then saving 50% or paying off debt with that 50%. I think this is very important because not only are you saving, you’re also rewarding yourself…this is extremely important to me.
    When you save 100% of this money, or put 100% into your debt, it’s very hard to appreciate what you’re actually doing. By putting 50% into each category you feel good that you’re saving a nice chunk, but you also feel good that you’re rewarding yourself in the short term.

    • Brad Chaffee says:

      I have to respectfully disagree with you Brian. We used 100% of both our last two returns to pay off debt and I can tell you we appreciated every dollar that was used. Now we are debt free and can reward ourselves for being debt free.

      With no savings, and lots of debt, what is it exactly that you would be rewarding yourself for? Earning income? That’s hardly a justification for reward. You reward yourself for sacrifice not just because you think you deserve a reward. Most people look at it the way you do, as did I, which was why I used to use the same justification to blow my refund.

      Not picking on you but I couldn’t help but respond to this. I hope it doesn’t deter you from commenting in the future, I really appreciate you taking the time to do so. You actually helped make my point so thank you. πŸ˜€ I hope next year you think about this post before you decide to reward yourself. Instead get rid of your debt.

      People Need An Excuse To Spend Money, And They’re Eager To Find One You helped me out on this post too. πŸ™‚

      • Brian says:

        I understand your point. I’m not sure how many readers on your site are like me then, but my student loan payments are already very high, and I feel really good about how my loan is doing. 15k and it’ll be paid in 1 year. I’ve also reached the 1k emergency fund. So I don’t mind giving myself part of the found money for “fun”, it’s what keeps me going. Putting all“found money” into debt, or long term savings is great from a purely financial prospective, I agree 100%. But I believe at some point you need to pat yourself on the back and say “wow last year I paid 12k off of my loan, time for a reward”. To me, it’s what keeps you going. Something to look forward too.
        I hope next year you think about this post before you decide to reward yourself. Instead get rid of your debt.
        Like I said…and I know it’s not a general statement. I have already made my get out of debt plan, with lots of sacrifices, but I still believe you need to reward yourself in order to make progress.
        You reward yourself for sacrifice Absolutely agree. If you’re making huge sacrifices (boosting payments on credit cards, or Fast tracking loans) I think you should reward yourself.

        Also my apologies for this. I had made the assumption that this post should include options for people who are also out of debt. With that in mind, like i said, I don’t think it’s so great to save 100% of your return.

        • Brad Chaffee says:

          Here on EOD we follow Dave Ramsey’s baby steps to planning our financial future. This means that you start from the beginning and you focus ALL of your attention and energy at completing the baby step you are on. If you have no emergency fund, you save $1,000. Once that’s done you pay off your debt by using the debt snowball method. The key to this plan is focused intensity and it really provides the momentum needed to just get out of debt now, instead of casually knocking it down. (That still works, but the idea behind this is that if you sacrifice now with intensity your benefit comes much faster than if you spread over a longer period of time.)

          That’s the plan we used to get out of debt and the one I believe in the most! It worked, unlike some of our other attempts, one of which included your method. Understand, I am not knocking your method, I am just saying intensity has many more benefits than what you see on the surface, and the sacrifice it requires is VERY short term. It’s not forever!

          Here’s what I have learned Brian. Progress is all the motivation you need. It’s like making a list of goals and completing them. each time you complete one you are motivated to do the next to get that same feeling of accomplishment. I think that rewarding yourself prematurely kills the momentum you would have had if you stayed on course.

          You are absolutely right, personal finance is personal, therefore you may decide to do things differently. Any plan is based solely on the priorities of the person or persons—which is what makes every plan different.

          Personal finance is ALSO long term and includes many aspects that do not just stop with getting rid of debt or having an emergency fund. It is why I did include the section on INVESTING which is one of the next steps after completing your fully funded emergency fund of six months of expenses, and paying off all of your debt except for the house.

          I don’t think it’s so great to save 100% of your return.

          I can tell you that it is VERY GREAT, but will admit that before we changed our outlook about money and what we thought we were entitled to (reward),we struggled with this concept. The reward for us was NOT HAVING any more debt with savings in the banks. For some reason you seem to have a disconnect with the reward that is being prepared and less burdened by debt.

          Our life is so much more richer because of it and we are able to do so much more NOW—things we couldn’t do before. We can go out and spend a little money on a new TV or something “rewarding”, but it is so much more rewarding NOT to since our contentment lies in a different place these days.

          Thanks for the conversation. πŸ˜€

          • Brian Drolet says:

            I will agree to disagree. It’s just 2 different outlooks. My way works for me, and others. Your way works for you and others (clearly…your blog is awesome πŸ™‚ ) Which is also why I read this blog and many others; I can take pieces from each to formulate my own personal finance plan. Also thanks for the conversation..I didn’t expect such a big reply from the author :D. I guess I just wanted to open up the idea of actually spending some of your tax return on yourself, ya know?

          • Brad Chaffee says:

            Thanks so much for the compliment! πŸ˜€

            I want you to know that I was not throwing out the reward yourself idea all together but wanted to give you the other side of the argument as well—it just so happened to be the way we did it. If someone decides to reward themselves I do not necessarily think it is bad, again it’s based on what’s important to someone. As individuals we all put a different value on things.

            I want to thank you for not taking my comments personally, and responding with class. Some people start name calling but I think we had a healthy form of debate about it. If only everything could be handled the same way. πŸ˜€

            Thanks for reading EOD, and I hope to see more of you in 2010. Your opinion is ALWAYS welcomed here. Thanks! πŸ™‚

          • Brian Drolet says:

            Haha, cool. I’ll be around πŸ˜‰

    • Brad Chaffee says:

      Also, I would say that rewarding yourself with 50% is quite high. What if you spent 20% and put the rest into savings or paid off debt?

      Had we used this approach to paying down our debt we would still be in debt, so I hope you understand why I must disagree. Sometimes delaying gratification is a reward in and of itself when you are accomplishing the goals you set out to accomplish.

      Maybe I need to write a post about redefining the word “reward” too. πŸ™‚

      In Order To Succeed Financially, You Must Redefine The Word β€œDeal”

  9. April B says:

    We’re just starting out on getting out of debt, so we’ll finish our baby EF, then use the rest to pay down some credit cards.

    • Brad Chaffee says:

      You are on your way April! Good luck and congratulations on getting started. When you look back after becoming debt free you will be so glad you stuck with it! πŸ˜€

  10. Sam says:

    Great post, Brad! This is mirroring some things I’ve been thinking about recently. We’ll be using our tax return to pay off an auto loan. This will be the first car either of us has paid off! And we’re paying it off four years earlier than the agreed financing period! Can’t tell you how good it feels to be so close to paying it off! Any amount left over we’ll either put in savings or pay off some small student loans (I’m leaning toward paying the loans).

    • Brad Chaffee says:

      Congratulations on getting rid of your first car payment! That is HUGE! Very happy for you and I certainly wish you all of the luck in the world in getting that extra burden paid off! πŸ™‚

  11. Tracy says:

    I will be using mine to pay off last years tax debt. Sigh…but at least that’s another thing off the books!

  12. Anna says:

    Great article. This year, assuming there will be a refund, we will be paying off our debt.

  13. Stop picking on Brian! Hehe, just kidding, good healthy conversation going on here. As a member of both camps, first the large refund, treat myself crowd and later the angry government money lender I much prefer the later. I now trust myself enough to build my own savings account thank you very much and it makes it a lot easier to not think of it as “free” money. Last year that whole sucker went to my debt. This time around, my return should be pretty small so any extra is going right to the emergency fund. My fun is already planned with my actual budgeted money. I like to have a plan in place for any windfall be it tax return, bonus, inheritance. That way my wife and I already don’t need to discuss we merely are able to accelerate that plan. Most people aren’t that dorky I know but it’s what’s help us dig ourselves out. Great post Yo!

  14. Wookie says:

    Well, since we’re just starting our debt elimination plan we’ve had the very fortunate experience of knowing exactly what to do with any tax refund. January 2010 was to be the beginning month – everything “up to date”, baby emergency fund, etc. as per Dave Ramsey. Then the wife got a much larger bonus than expected in December, and we received an unexpected cash gift from my father for Christmas. In the past, we’d spend the windfall on things we didn’t need – and regretted it when we couldn’t figure out where the money went. Now, having educated ourselves, the extra money went to debt right away – paid off TWO debts before the end of 2009! The original goal was to be debt free in 2 1/2 years from Jan. 2010, but with the accelerated starting point, we’re looking at a much quicker time frame. Include my bonus which will come through in the next month or two, a tax refund, and we may be able to get rid of debt in less than 2 years.

    Paying off debt is much more fun than any “treat” we could have gotten. The treat has come in peace of mind knowing that we are on the right track and that we’ll get to our goals much quicker.

  15. I know that in the PF world the pat advice is usually pay off debt, but I tend to lean toward saving a tax refund–or any other windfall–if only because by saving it you’re mostly preserving your options for a later date.

    It would be kind of lousy to use it to pay off debt, then find you need it the following month. By saving it you can keep it until another windfall comes in, then choose to use some of the total to pay off some debt while keeping the rest.

    Liquity is so much more important than we realize!

  16. Angie says:

    We just had our taxes done yesterday and we are getting a refund this year. A pretty hefty refund at that! (We never know from one year to the next if we are going to have stock option issues that trigger the AMT, so we withhold extra just in case.) We are debt free except for our mortgages and have 3 months in savings, but want 6 months. We will be donating a portion to our church, taking about 15% for a family outing, and the rest will be used to put a new engine in DH’s car and fill our “freedom account” This account holds the money we will need for our annual & irregular expenses. We try to fund this at the beginning of the year, so that we can focus the rest of the year on our emergency fund. I know it sounds like we’re splitting our focus, but in reality we are “snowballing” our priorities – this refund allows us to finish all of them except the emergency fund.

  17. Vitaeus says:

    my family is ending up getting an $11,000 return this year due to the home-buyer and energy credits, plus having 2 kids. This sounds great until you hear the rest, , it will pay off the used car and pay about 25% of our credit card debt. This to us is the best value for the money. It is tempting to spend about $2000 on stuff to make us more self-sufficient, but getting the debt monkey off our backs is sooo much more useful, since the unemployment runs out in september.

  18. Jenn says:

    Our refund is largely the result of contributions made to our tax sheltered retirement account during the year. Contributions done through work are tax adjusted at source, but contributions done on our own are not. Sometimes we even make one last giant contribution the day or two before the deadline (Feb 28)as long as we are ready to file our taxes the same day. This year we put $5k on our LOC for 3 weeks while we waited for our refund. Part of the refund repaid the “loan” in full and the rest was used as the first contribution for 2010. Other years we’ve used the refund to pay down the mortgage.

    I can’t remember when we’ve used the refund for anything other than retirement savings or a mortgage paydown. All other “fun” money is part of our normal budget and this is retirement contributions that cause a refund that then becomes more retirement savings, and so on…. The ultimate in recycling!

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