Millions of taxpayers suddenly have refunds from the Internal Revenue Service, but financial experts say they would be better off paying off debts than going on shopping sprees. NY1's Money Matters reporter Tara Lynn Wagner filed the following report.
As of April 5, the Internal Revenue Service had sent out more than $214 billion in tax refunds to more than 77 million taxpayers. The average check was just over $2,700. If taxpayers are wondering what to do with the sudden infusion of cash, financial experts say they should not take it to the mall.
"We have to be careful of our temptations to run out and buy things that we think we need but maybe we really don’t need those things, it's more things we want," says Scott Mahoney, a financial advisor at Morgan Stanley.
Instead of blowing what many people see as free money, Mahoney recommends using that check from the IRS to pay off some IOUs.
"You might have some revolving credit card debt. I would start there as the number one place to put your money from your tax refund," he says.
Alexa Von Tobel, the founder and CEO of Learnvest.com, agrees, saying, "Hypothetically, if you have $3,000 in debt and you don't have any other financial immediate needs, yes, pay down your credit card debt. That is the first place to go."
She is quick to stress the importance of having the ability to pay for oneself, especially for those who do not have a big enough emergency fund.
"You never know when something could happen from a Hurricane Sandy to simply you getting sick or your car breaking down," says Von Tobel. "We recommend at least six months' [worth] and at Learnvest ideally nine of the take-home pay that you have. So making sure that is fully filled to its coffer, so that you are safe and you can sleep better at night."
Those who are lucky enough to their immediate needs covered can put their money to work by funding their retirement.
"You might want to think about your 401k. You might need to max out your 401k. You have a great opportunity, use it and increase your contribution to your 401k. your company can match it, it's free money," says Mahoney.
Most refunds are issued by the IRS in less than 21 days, and even faster for taxpayers who e-file and use direct deposit. Taxpayers who have not received their refunds yet can track their progress by clicking "Where's My Refund" at irs.gov.