Should you splurge on your tax refund? Only if you can say yes to these 3 things

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Before you use your refund to treat yourself, make sure you don’t need it for anything else.

Key points

  • Most filers end up with a refund from the IRS.
  • If you have a lot of money to make, make sure you can afford to splurge before going this route.

April 18 was the tax filing deadline, and whether you filed at the last minute or weeks in advance, you could now receive a large refund. And if so, you may already be planning to use that cashback to get yourself something that will make you happy, whether it’s a vacation, an update to your wardrobe, or the luxury bedding set you’ve been coveting for months.

There’s nothing wrong with using your refund to treat yourself if your finances allow it. But before you take that money and splurge, make sure you can say yes to these three things.

1. Is your emergency fund full?

You never know when life might throw you a curveball. It is important to have money hidden in savings in case this happens.

If you don’t have at least three months of living expenses in the form of savings, you really shouldn’t spend your refund until you’ve reached that goal. In fact, three months’ worth of bills is really the minimum amount you should be aiming for, so even if you hit that threshold, you might want to wait to spend the money the IRS sent you and aim for six months of spending in the bank.

2. Are your credit cards fully refunded?

Credit card debt is really bad news. For one thing, it can cost you extra money in the form of interest charges. It can also cause your credit score to drop if you accumulate too much. And from there, you might struggle to get an affordable loan or get permission to rent a house.

If you have a lingering credit card balance, you really should use your tax refund to pay it off. If there is money left, from there you can feel free to spend it. But you shouldn’t splurge until your credit card balance is down to $0.

3. Are you on track to achieve longer term goals?

If you’re tired of renting and have saved up to buy a home, a big tax refund could get you closer to your down payment. Plus, if you’re in your 30s and haven’t started putting money aside for retirement yet, your refund could help fund your IRA for the first time.

These are important goals to achieve. While spending your tax refund on something fun may provide you with more immediate gratification, using that money to achieve these goals is likely to benefit you more in the long run.

Should you use your refund to splurge?

We all deserve to treat ourselves once in a while, and your tax refund could be your ticket to something special. Just make sure you really are in a strong enough financial position to make the splurge possible. It may take a bit of self-control to use this refund wisely rather than blow it up, but in the end, you’ll probably be thankful you went this route.

About Clayton Arredondo

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