Windfall wisdom: What to do with that tax refund

Donna Skeels Cygan
Invest in Joy
Donna Skeels Cygan

The IRS estimates that more than 80 percent of American taxpayers receive a tax refund each spring, and the average amount of the refund is approximately $3,000.
Many people look forward to their tax refund, and they do not mind that too much money is being withheld from their paycheck throughout the previous year (which leads to the refund).
So, let’s first tackle what not to do with your tax refund, before we move onto how you may want to spend the money so it brings you more happiness.
Do not “fritter it away!” (Yes, fritter is a word that means “to squander or disperse piecemeal; waste little by little”). Do not deposit your tax refund in your checking account, only to discover a few months later that it was all spent and you do not know where the money went.
Do not use your refund money to buy another big-screen TV, the latest smart phone, or trendy clothes or shoes. Do not spend it on a fancy meal that will be over quickly.
Use part of your refund to brighten your surroundings: paint a room or gussy up with new furniture or pillows.
Put a plan in place now so you will be ready when your tax refund arrives. My recommendation has always been to save or invest at least half of your refund. Here are three suggestions:
1. If you do not have an emergency fund that would cover six months of expenses, open a savings account and deposit at least half of your refund check.
2. If you have credit card debt or medical debts, use at least half of the tax refund to pay down the debt.
3. If you already have an emergency fund and you do not have credit card debt, consider opening a Roth IRA if you qualify. For rules on Roth IRAs, see
If you do not invest in a Roth, invest at least half in a taxable investment account.
What are some ideas for the other half of your refund? Of course, your car may need new tires, or perhaps you have been wanting to replace the refrigerator for years. These may be necessities, but consider a few more options: 
• Plan a summer vacation and set aside the tax refund to cover a part of the expense. We know that spending money on experiences is always recommended above spending money on “things,” but positive psychology research also tells us that the anticipation of an experience adds to our happiness. If your children (or grandchildren) are young, consider starting a colorful paper chain that hangs on a doorway in your home. Each time you have saved $20 toward the summer vacation, let your kids add a ring to the chain using construction paper. This teaches them the benefits of saving for a future goal. 
• Decide to be a lifelong learner. Take a course from a local college or university, or sign up for an online course from,, or 
• Take a trip that includes volunteer work. Check out or 
• Give a part of your tax refund to a charity. Research has shown that the reward centers in our brain (the nucleus accumbens) light up when we give to others who are less fortunate. In essence, doing good feels good.
• Set aside a portion of your tax refund to pay for lunches or dinners with friends. Make an extra effort to get back in touch with old friends. Psychology research tells us that the number-one way to become happier is to spend more time with friends and family.
• Do some volunteer work. Explore different types of volunteer work. (Check out It will make you feel great. Then treat yourself to a new book or flowers.
• Decide to take singing, guitar or tennis lessons. Sign up for an art class. Buy yourself a new bicycle. Take a weekend trip that includes cooking classes or a focus on wellness.
• Paint a room in your house a bright, cheerful color. Yellow is associated with joy and energy. Blue is considered relaxing and induces creativity. Buy some new furniture or colorful pillows.
• If your house is cluttered, hire someone to help you declutter. Give all of the excess items to charity. Getting organized while simplifying your home and your life will feel great.
• Spend a part of the tax refund on your back yard – build some flower beds or a vegetable garden that you will enjoy all spring and summer.
We know that money doesn’t buy happiness. However, it certainly impacts our happiness if we spend it wisely. Having a tax refund is an excellent opportunity to save some for the long term, while also adding more joy to your life.
Donna Skeels Cygan, CFP®, MBA is the author of the multi-award winning book The Joy of Financial Security: The art and science of becoming happier, managing your money wisely, and creating a secure financial future. She has been a fee-only financial planner in Albuquerque for 20 years, and is the owner of Sage Future Financial, LLC.,