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  • Writer's pictureEvan Werckenthien

Forget the Boat: Create a Plan for Your Tax Refund

Updated: Aug 4, 2020

As the tax filing deadline draws near, millions of Americans will be receiving refunds.  But how many of them have a plan?  For many Americans, a tax refund can be a larger sum than a whole month’s income, as the 2015 average refund was $3,100 (according to the IRS).  So as much as you want to buy those basketball tickets to see Butler in the Sweet 16 (thankfully, I did not) or go on a shopping spree, you’re better off taking a step back and making a plan. Tax refunds can be a tipping point for financial success.

If that seems like an exaggerated statement, think about receiving the average refund ($3,100) for ten years.  That would add up to be $31,000 dollars – not such a small amount anymore.  Refunds can be a great vehicle for creating and improving financial stability. However, they are very easy to squander because it feels more like a bonus rather than salary you have earned.  More times than not, they are used to enhance our lifestyle.  It is easy to kick the can down the road one more year and say, “I’ll be productive with my refund next year–let’s go buy a boat.”  I will explain one technique to counteract this desire later in the post.

However, before I get too far down that rabbit hole, below are some items which may give direction for what to do with your refund.

– Emergency funds: Creating or increasing emergency funds is the first place to look.  A lack of short-term savings can create financial nightmares with unexpected job loss, medical bill, repairs, or other large payments.  Emergency funds will keep you on your feet and out of unnecessary debt if circumstances arise.

– Pay down debt: Eliminating or reducing student loans and credit card debt can be the most productive areas to put extra money.  Eliminating or reducing the outstanding balance on these loans will help to free up cash flow and save money on interest by paying them off early. 

– Retirement savings: Saving 10% – 15% of your gross salary for retirement is important.  If you are not saving enough or any at all, this is an easy way to get back on track.  If you are already maximizing your employer’s match at work, look at an IRA or Roth IRA.  Bonus – if you really hate paying taxes, your IRA contributions may provide an even larger tax refund in the following year… Take that, IRS!

– 529 college savings account: Saving for college is also an option.  Many people in their 20s, 30s, and 40s know the pain and large burden of college expenses and student loans.  With the increasing cost of college, putting money away for little Johnny or little Susan will help make college more affordable down the road.  Depending on the state and the specific 529 plan, there may also be some enticing tax benefits.     


– Other goals: If all the above areas are being adequately addressed, it is time to look at what other goals you may have.  Putting aside funds for a down payment, paying down your mortgage / car loan, or saving for a vacation may be a good option.

With that being said, I am familiar with the famous 1980 quote from The Shining, “All work and no play makes Jack a dull boy.”  Despite not even being born when the movie came out, I understand there is something to be said for keeping a balance in life between work and play.  In this case, the balance is paying down debt / saving for the future vs. instant gratification.  I think it is still important to enjoy the small victories.

Let me take a step back– Disclaimer: I am not advising spending all or most of the refund on fun or lifestyle items.  However… taking a small portion of the refund–maybe $200-$300—and putting it towards a nice dinner, new furniture, clothes, etc. may be a good idea.  It not only will give you immediate happiness, but it may also ease your reluctance to writing a check for the remainder of the refund for an IRA, 529 college account, or a debt.  Creating and sticking to a strategy with your tax refund will increase financial stability throughout your life.

Feel free to reach out with any questions,

Evan Werckenthien, CFP©

Work: 317-587-0858

Cell: 317-627-2529


Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. E.W. Wealth Management and Cambridge are not affiliated. The information in this email is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this email in error, please reply to the sender to inform them of this fact. We cannot accept trade orders through email. Important letters, email, or fax messages should be confirmed by calling 317-587-0858. This email service may not be monitored every day, or after normal business hours. Cambridge does not provide tax advice.

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