The Average Tax Refund And How To Spend It

The average tax refund is roughly $2,750 for the 2018 tax year. With the US household income at around $62,000, that's 5% of one's income they've overpaid to the evil empire. Everybody knows that getting a refund is like giving the government an interest free loan.  But, with interest rates the way they are, who cares?!

If you were to ask people to put aside $230 a month to save $2,750 a year, I bet most would fail due to the lack of discipline. As a result, I think it's fantastic most people are getting refunds. The key is not blowing your refund on some splurge you wouldn't otherwise spend money on if you didn't get a refund.

In 2014, I had to pay about $1,000 more in Federal taxes, but I got several thousand back from the state of California. For the past 10 years, I've saved or invested every single refund I've received, and this year was no different. Boring! At least a philosophical post came out of it entitled, “Is Paying Taxes A Form Of Charity?

Here's a neat infochart with more ideas of what to do with your refund. I like the rocket ship chart of investing your refund every year until you retire with a 7.5% return. Buying a nice Macbook Pro would be sweet too, however, that's a corporate expense, baby!

If you are like me, you should be motivated to invest and pay down more debt with your refund, rather than spend it on superfluous things. Although buying 1,000 lottery tickets sure sounds like way more fun!


1) Take your boss out to lunch (10% / $300 over the year). Your number one money-maker is your job; hence, it behooves you to invest as much as you can in making yourself the most compensated employee possible. One of the best ways to get paid and promoted is to build a tremendous support network of individuals predisposed to root for your success. When it comes time for a raise and a promotion, your name will float to the top of the list because managers tend to take care of people they like and disregard people they don’t really know. It doesn’t matter how rich somebody is — nobody can resist a free lunch!

Estimated return on lunch: 1,000%+

2) Donate to a charity that matters most to someone whom you want to impress (10% / $300). If for some reason you feel bad about taking your boss out to lunch, support her in a different way by volunteering your time or money to a charity that she cares about deeply. (Ideally, you will sincerely care about the charity as well, for congruency purposes.) Nothing builds better relationships than finding something shared in common that greatly matters. Because his mother had died from lymphoma years before, a friend of mine supported a client’s lymphoma marathon charity. The client was raising money for lymphoma research because his close friend had also died from lymphoma. Not surprisingly, the two men formed a very tight bond,and from then on my friend was perennially ranked #1 with that client.

Estimated return on donation: A lifetime connection + 1,000%+

3) Take your loved one on a weekend getaway (30% / $900). Money doesn’t matter much if you don’t have somebody you love with whom to spend it. Assuming there’s someone special in your life, you probably neglected, upset, disappointed, or saddened that person at some point during the year. Use some of your refund to apologize and show them you still love them deeply. If you don’t have someone special, then offer to take your best friend somewhere to catch up on good times and make new good times. Poll after poll shows that having a good circle of friends is the number one source of real happiness.

Estimated return on friends and partners: Priceless.

4) Thank your parents (30% / $900). Without our parents we would not be where we are today. Although most of our parents don’t expect any special thanks for raising us, it’s always nice to give back to those who may have sacrificed the most for us. Some parents are financially struggling due to unlucky breaks or poor decisions and are too proud to ask their children for help. Touch base with them and allocate part of your refund to those who could use the money most. They’ve spent a lifetime working to provide not only for you, but also for themselves in retirement. Help make their golden years the best years possible.

Estimated return on thanking our parents: Priceless.

5) Treat yourself (20% / $600). A tax refund isn’t new money; it’s money that you earned and that was owed to you all along. Most financial advisors would encourage you to save your refund, invest your refund, fund a ROTH with it, or use it to pay down high interest debt. By now, however, you’ve already invested 80% of your refund in steps 1-4, with returns that range from 1,000% to priceless; go ahead and treat yourself with the remaining 20%! A 1,000% return on a lunch investment blows away any historical 8% S&P 500 return average.

Estimated return on thanking yourself: Sanity and motivation.


Because the average refund is a relatively small absolute dollar amount, going the traditional route of investing or paying down debt is not an exciting proposition. Even if your entire $3,000 refund returned a healthy 10%, that’s only a $300 pre-tax return… and how much would that really change your life?  Focus instead on using your refund to improve existing relationships or make new relationships. Not only does it feel better to give than to receive, you’ll likely end up receiving way more down the line anyway!


Manage Your Finances In One Place: One of the best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.

The best feature is their Portfolio Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging!

Finally, they launched an incredible Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely check to see how your finances are shaping up as it's free. I've been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.

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Tax Savings Recommendation

Start A Business: A business is one of the best ways to shield your income from more taxes. You can either incorporate as an LLC, S-Corp, or simply be a Sole Proprietor (no incorporating necessary, just be a consultant and file a schedule C). Every business person can start a Self-Employed 401k where you can contribute up to $54,000 ($18,000 from you and ~20% of operating profits). All your business-related expenses are tax deductible as well. Simply launch your own website like this one in under 30 minutes to legitimize your business. Here's my step-by-step guide to starting your own website.

Start a simple business to pay less taxes and contribute more to pre-tax retirement accounts
Start a simple business to pay less taxes and contribute more to pre-tax retirement accounts. Instead of paying taxes on $100,000 in income, you're only paying taxes on $12,000 for maybe a $2,000 tax bill, or 2% effective tax rate.

Updated for 2019 and beyond. 

Photo: Peterhof Palace, St. Petersburg, Russia.

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36 thoughts on “The Average Tax Refund And How To Spend It”

  1. I made ove 48,000 and they say my refund is only $167.00 why is that? I had HR block do my taxes.

  2. That’s a pretty cool infographic. :-) We already got our tax refund this year and I created a RISE plan for it. R- replace some of the money we borrowed to pay for FinCon12. I- invest. S- save money for next year’s Europe trip. E- experiment, my husband is getting to learn about stocks and play around with them.

    So far, I’m thrilled with the plan; it’s much better than blowing it on electronic toys like we did a few years ago.

  3. College&Beyond

    I got my 3K refund on March… Used 20% to pay some high interest debt (Darn Credit Card you win this round) 15 % to buy a new cheap computer , mine was already screaming to be put out of her missery and the other 65 % went into my Savings/Investment accounts.

    I dont mind for now giving the Government an interest free loan, it help me boost an extra savings amount at the end of the year, and makes me feel I am constributing to the well-being of the country (except for the incorrectly spent money, but I will refrain from that for the moment) Uncle Sam is helping with my college education, and also gave me the opportunity to make my life here, as an inmigrant that means a lot to me. So I may as well give back some of what I have earned as a interest free loan.

    I wish more people were wiser with their tax returns, but I think that is too much to ask for. At least I know great websites like this one and others are making the effort to inform people on financial matters, so there is hope after all.

  4. We typically get a refund of between $3k and $5k. We usually use it for a large-ish home improvement project, and save the rest. One year we got our house painted a new color, another year we installed energy efficient windows throughout. This year, we used it to pay for a surgery for our 15 month old.

    We could take the money throughout the year, as we’ve grown in our discipline as we’ve matured, but I don’t mind letting the Gov’t borrow it for free for a year. I also started doing some contract work “on the side” and am not quite sure what I’m going to have to pay in taxes at the end of the year, so I didn’t adjust my salaried withholdings.

    Great article!

  5. I got about $800 back fed/state combined. I used part to pay the property taxes/registration on my car, spent a little bit on clothes and food to treat myself, and put the rest into savings.

  6. Sam, I agree with your logic about refund. It’s for those who are not disciplined in the first place. Problem, my friend, is that those spendolics will spend every single dollar before even they receive refund from our royal government. There is a thriving industry that lends money to these same morons, and making killing. Thank you Uncle Sam!

  7. Unfortunately, this year I owe some income tax to the IRS and a very small refund from the state. The net is roughly $1,200 owed. Normally I am better at estimating taxes and usually receive a couple hundred dollar refund. I always put it in savings!

  8. I owed money.

    As you say, with interest rates so low, it’s not a big deal either way if one gets a refund. It may even mix well with human psychology- the money that they overpaid little by little might not have been saved by most people, but if they get it in one lump some, they might save some of it.

  9. I love the illustration!

    I think I did pretty well at estimating my withholdings last year – my refund was under $1,000. I took the “boring” route and did exactly what I would have done with the money if I’d seen it throughout the year and put it into my down payment savings account. I get paid monthly, so it was nice to see that account get a boost partway through the month :)

    And now I’m teaching the magic of adjusting withholdings to my friends so that they too don’t have large tax bills at the end of the year! (Our employer doesn’t take enough taxes off of bonuses… Sigh.)

    1. Interesting what you say on bonuses… b/c here in the US, a bonus is treated as that week’s pay X 52. So, let’s say you got a $10,000 bonus, the IRS will think you make $520,000 a year, and therefore tax it at the highest marginal tax rate!

      1. I’m in the US! My employer takes a flat 25% of federal income tax off of my bonuses, which is bad because I’m already in the 28% tax bracket from my regular salary. So I’ve started having them take off more tax from my regular paychecks to make up the difference.

  10. Kind of boring, but with my $1,500 refund, I just saved it for my next real estate purchase. I actually don’t have a problem at all with under with holding. Like you said, most people won’t be able to save a couple hundred a month, but if it’s taken out of their paycheck, they absolutely cannot spend it! The government is helping you save, the key though, is to not splurge your refund check once you get it..

    Financial Advice for Young Professionals: What Should I Do With My Tax Refund?

  11. I put all of my refund about $8,000 (state and federal) into the bank.

    My wife is self employed and I do not want to do estimated taxes – thus, I overpay and get a refund every year. IF interest rate were higher I might try to do a better job estimating what I owe – however with rates so low – no worries.

    In past years I have put my tax returns towards my mortgage – however with my rate so low on my mortgage – I would rather keep around “just in case” or invest in something other than paying down my mortgage.

      1. Thanks for making me smile!

        Yes a combined return!

        No Vegas for us – just 6 weeks or so some where in Asia in November-December – possibly Sri Lanka this year.

  12. We’re getting a refund this year for the first time since we’ve been married. If it comes in the next week or so, it will be just in time that we won’t have to transfer money from one account to another to be able to wire in our down payment/closing costs on another rental home. We don’t consider it (or any income, really) as “found money” to be spent on something special – all of our income is part of the same pot. Regular and discretionary expenses come out, and the rest is saved to be invested.

      1. Haha, nice one…Well as it happens we’re spending 11 days in Hawaii and returning the day before our anniversary. So that will have to count. It will likely cost at least the amount of our refund, excluding the plane tickets we already bought. But my wife is fully on-board with our spending/saving/giving/investing strategy and would not be pleased if I spent big bucks on an anniversary gift without warning!

        1. We don’t have a budget – due to the generosity of the wife’s parents we’re not paying for lodging (and they’ll be with us for the Maui portion of the trip). Our biggest cost will be the rental cars and food (aside from the plane tickets we already bought). We love hiking, which is free, and snorkeling which is generally free; but we may be getting scuba certified in advance of the trip so we’d spend on a scuba trip or two, and a few other activities.

  13. Robert @ The College Investor

    I haven’t got a refund in years but I regularly invest over the course of the year anyway. My paycheck deductions don’t cover the side incomes, which I’m fine with since I don’t want to loan anything to the government.

  14. I think this info graphic is so interesting. I also think you are right – most people don’t have the discipline to put money away so paying extra taxes and getting a refund is almost like forced savings.

    1. Yes, a refund is most definitely like forced savings. I don’t mind the gov’t forcing me to save a little… but anything more than say…. $3,000, and screw you Evil Empire! I want my money! ha.

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