The Average Tax Refund And What To Do With It

The average tax refund is around $3,000 in America according to the IRS.  Since saving, or not spending $250 a month is difficult for many, I’m OK with such a refund.  With basic savings interest rates close to zero, your opportunity cost is pretty small.  If we are to compare the average tax refund to the average per capita income in America of $50,000 (~$40,000 tax), $3,000, or roughly 6-7% of income is a pretty meaningful number.

Your goal should be to not only max out all your retirement plans (401K/IRA), but to also then save another 20%+ if you’ve been a long time reader of this site.  With 7% out of 20% down, you’ve only got to find a way to save 13% more!  Not bad at all.

There’s a big debate on whether you should have a tax refund at all, given that simply means you overpaid our incredibly inefficient and wasteful government.  Since most people can’t save for cookies, I’m of the opinion that a tax refund is good for most people.  Even if you did have that $3,000 in your bank at the beginning of the year, your savings interest rate will be less than 0.5% as of 1/15/2012, which is a small opportunity cost.


Let’s do a little exercise, shall we?  Since we all make various amounts of income, take your average annual gross income over the past 3 years and multiply it by 6.5%.  Are you happy, or disgusted that you will be getting a refund of that size?  I’d personally be very disgusted if I knew the government was keeping that money from me all year long to go give themselves raises and spend money on frivolous things which further increase our budget deficit.

What’s important to realize is that numbers mean very little in a vacuum.  You always need to be comparing one number to another, to get some sort of perspective.  If you love tax refunds and make $1 million a year, $3,000 isn’t going to elevate your heartbeat one tick.  However, if you got a $65,000 refund, you’d probably be ecstatic.  However, mathematically, I’ll tell you that it is virtually impossible to get such a size-able refund if you make that much thanks to all the phase-outs.  In fact, if you are making over $500,000 with a W2 (not a small business), you will likely be paying out the wazoo come tax time!


With the perspective that $3,000 is potentially 7% of your total annual after-tax income in mind, there’s really only several things I recommend you do with your refund.

* Make it disappear. In other words, put your $3,000 into a savings account at another bank so that you cannot access it easily.  Don’t go blowing your $3,000 on anything unnecessary, unless you’ve already maxed out your 401K and saved more than 20% of your income.  Trust me when I tell you that your savings will grow immensely over time if you are disciplined.  You’ll wake up 10 years from now and see $40,000 in the bank, just from tax refunds!  Go broke to win big!

* Pay off your credit card or car loan debt. Listen, if you have revolving credit card debt that costs much more than 5%, you really have a spending problem.  You do not deserve the things that you are buying because you simply don’t earn enough.  It is stupid not to pay off your credit card at the end of each month and take advantage of a free 30 day grace period.  Furthermore, if you have a car payment that has an interest rate of much more than 5%, and whose value is more than 10% of your gross annual income, you are also wasting your money.  Seriously, these two debts alone are hurting your freedom now, and in the future.  Get rid of them and follow the 1/10th rule of car buying for goodness sake!

* Help someone else. If you’ve already put on your oxygen max, use the money to help someone else put on their own.  There’s nothing better than helping a friend or loved one in need.  Theoretically, we can “over save” to the point where we are severely crimping our lifestyles and generating a bunch of angst in the process.  Carefully tweak your savings rates each month to see what your comfortable zone is.  I believe one should spend their money as they see fit, but not at the expense of their future retirement.

* Invest in yourself. This is my most favorite option because the returns on investing in your education, communication skills, language skills and so forth are multi-baggers! It always seems a little foolish to pay $1,000 for a presentation class until you confidently get on stage and wow your listeners to act. Learning another language is priceless if you are dealing with that particular region for business. I firmly don’t believe one can get enough education.

* Invest in your business. If you’ve got a small business, don’t be afraid to spend some CAPEX to provide a better experience for your customers. Obviously weigh the amount of money you will spend by your current revenue, balance sheet, margins, and payback period. I view a small business like one’s child. Nourish it and watch it grow.


A tax refund feels good.  Even though a tax refund is rightfully your money in the first place, it feels like we are getting an extra bonus for the year.  And what do we tend to do with special bonuses?  We tend to reward ourselves.  Savings and the comfort a cash pile brings alone should be your reward.  Don’t blow your refund on stupid things, unless of course you are stupid and can’t help yourself.

Oh what the heck, let’s go to Vegas and put it all on black baby!  And if it doesn’t work out, there’s always next year, right?  Do the right thing and save your tax refund or pay down debt you know you shouldn’t have!

Recommendation: I’ve been doing my own taxes with H&R Block At Home for the past ten years. H&R Block is so easy to use, anybody can do their own taxes with their step by step guide with audit protection plan. The program has consistently found thousands of extra dollars in tax savings I did not realize I could have. Why bother paying an account hundreds of dollars when you can learn more about your financials, find extra tax savings, and do it all from the comfort of your own home? Get the H&R Block At Home Online Free Edition!

Photo: Poker winnings from cruise, 2014.  Sam.



Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. says

    I like that you put help someone down as an option.
    I personally love hiding money from myself.

    Our next goal is to save for a house that has an inlaw suite so that my mom can move in with us. It will probably take at least 2 years to get the money we need to upgrade to a bigger place.

  2. says

    For me any “windfall” whether it be a tax refund or unexpected money is split into two categories. A major chunk, 90% or so, is put towards savings and I just leave it. Then I take about 10% and use it to enjoy myself. This could be a wild night out, a weekend getaway, or buying something that I had my eye on.

  3. says

    We have to pay every single year. We both claim 0, but it doesn’t matter. So, I don’t ever have to wonder what to do with my refund. Instead I have to come up with money to pay…

      • says

        We itemize whatever we can, but it doesn’t matter. Part of the problem is I max out my 401k. Since I just work part time, my after tax income can be pretty low (less than 1k every 2 weeks.) I think some computer program decides I make so little money that it barely takes out anything for federal taxes. I probably should do quarterly payments I guess.

  4. says

    I am heading to my accountant in about 10 mins! IF I have a refund my plan is to follow your advice. Exactly.

    Most will go to my auto debt and then some into a liquid savings account that I don’t really look as my money.

  5. says

    No big refund for me! Frankly, I don’t believe in big refunds. I have not done my taxes yet, however, I expect between Fed & State, it will be less than $500. I try to adjust my withholding to keep the refund low, because I would rather put the money to work for me during the year.

    • says

      I have difficulty putting money to work throughout the year, so I’m happy to have a more meaningful chunk at year end to invest or do whatever. Even if I had $1000+/month in cash-flow, I see it as something not meaningful enough as the temptation is too great to spend, and the amount too lowto get any returns. $12,000 however gets more meaningful.

  6. says

    I’ve never heard the 10% car rule; I really like that. It seems everyone wants to focus on the 30% rule for a home, but while a home may suck up cash flow, it won’t make you nearly as broke as a quickly depreciating car.

  7. says

    I thought you were going to say buy some gold coin and stuff it in your mattress on the hide your money option. :)
    I don’t think we’ll have any refund either. Usually we owe the IRS a bunch of money every year, but I just stuck 4k into the 529 so maybe that will help out this year.

  8. says

    We haven’t done our taxes yet. We added a dependent this year, so I know we will get a refund, just not sure how much. We will probably use a large chunk of it to pay for my daughter’s preschool where she will learn Japanese (my husband’s native language). If we don’t use it for that, we will save it for our next car fund.

    I really like this post. Too many people just squander their tax refund without thinking about it.

  9. says

    We usually owe but last year I miscalculated our withholdings and we are getting a refund. I absolutely agree with everything you said (hey, people do need to learn another language even if they don’t do business in that particular region) but… I am going to Vegas. Yep… a very trivial thing but I am doing it. :-) and I am damn excited!

  10. Charlie says

    Tax refunds are always a nice surprise although mine seem to keep shrinking. I try to budget for the year as if I’d get 0 refund or even owe taxes. I claim 0 deductions during the year too so that I can limit my urge to spend money I may end up owing too.

    • david M says

      That must be a large refund if only a small portion is being used for a trip to Asia! Flights alone for 2 from the US is probably going to be in the $3,000 range.

      I go to Asia every year for 6 weeks on vacation and generally spend about $7,000 for this trip.

      • says

        It is a decent size. We are lucky where we live in Canada because we get 60% of our education costs back on our income taxes if we stay here working. We actually found some really great deals on flights to Asia so this helped. We have also been saving ahead of time so we can pay cash for our trip. Any extra money we get like our tax refund can go into future savings.

        • david M says

          When we are on our trips to Asia, we always joke about being from Canada! We see so few other Americans on our trips.

          People are always amazed when I say I’m from America, especially when we were in Malaysia in November of 2001.

          Have a great trip. Not sure if going to Asia this year. Maybe South America or India instead.

  11. says

    This will probably be the first year I don’t get a big refund. I made a lot blogging this year! I’ll take it.

    In years past, I always put a bit into IRA, a bit toward vacation and then blew the rest throughout the year.

  12. says

    Great advice, I’ll be shoveling most of it into investments.

    I like the “Invest in yourself and your business” sounds like sound advice.

    Of course, there are always internet cafes (lol) ;)

  13. Brian says

    Making wise decisions now will determne who will be free later.. I made the mistake of getting into credit card debt and now I am sacrificing to get out of debt. Half of my tax refund will go toward paying off my credit card debt and I will not even blink. Money is nice but Freedom is my main goal.. Make wise decisions people it will benefit you in the future!

  14. says

    I wish I was average and living in the US :) I am only getting about $1000 back on my tax refund. I plan to put it in a registered account (get rid of it) like a TFSA or the RRSP. I would say I’m pretty disciplined with not wanting to spend that money on a trip or a big night out to vegas ;)

  15. says

    Just read this article, great advice. I received 5k back in a refund, normally I wouldnt allow the gov’t to keep all that money, but it was my first year itemizing as I bought a house last May. I’m working on keeping more of that money this year. I used it to pay down some low interest debt, and save for some life goals I have. I may invest a portion into Lending Club, as Ive been waiting for some extra cash to put in there, I have been enjoying good returns.

      • says

        I did pay down debt! Though I stopped funding my lending club account because Michigan won’t allow you to invest in microloans directly (at least not online), so I have to purchase notes through the secondary platform…it was cool at first, but the more I put in the harder it was to seek out and purchase the notes individually and then to continually reinvest as they were paid off. Returns are great, but considering the time value of money, it was taking up way too much of my time for too little money.

  16. Jewels Cortez says

    How do I subscribe to your financial site? I am 38, average approx under $13,000 annually (made loads more in past/poor legal & life decisions now impede my employability) am too motivated to settle there due to past. I just desire to only live moderately now w/peace of mind for my future.
    I own no home; car; credit card; or land! Where & how do I start my $ future?

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