Pay Down Debt, Save, or Invest?

As a father of 3 beautiful girls, Maeve, Phoebe, and Sophie, I understand that my job doesn’t end when they turn eighteen. It was easy to see how much they needed me when they were young. But, as they grow up and become more self-sufficient, my job as a parent takes on new meaning. Sure, they still rely on us for “room and board” and lots of unconditional love. But watching Maeve prepare for college, it hits me that my little girl will soon be on her own – and she needs to be prepared.

One thing Jill and I discuss regularly with our girls is how to manage money, and the importance of using it wisely. Given how crucial financial skills are, I’m often surprised by how little this is taught in school. To successfully manage their finances, kids need to learn about budgeting, planning, earning and saving. Teaching fiscal responsibility helps prepare kids for life in the real world.

This need becomes painfully apparent to me at this time of year. Tax Day has come and gone, and many of us were lucky to see a refund from Uncle Sam. In fact, the IRS says about 70% of folks who filed this year will receive a refund. With the new tax laws that went into effect in 2018, some folks received smaller checks from the IRS than last year’s, but there’s still plenty of money on its way to taxpayers. The average refund this year – as of the third week in March – was $2,915, or about $10 less than last year, according to the IRS.

If you’re one of the lucky taxpayers receiving a refund, what’s your plan? Sadly, I often see people with less than stellar financial skills squander their refund. Some of them, suddenly feeling a little “richer,” they spend it on everyday luxuries – a nice dinner, a shopping trip, that new fishing rod they’ve been eyeing – until there’s nothing left.

But, while this sounds like a lot of fun, it’s clear which folks have been taught financial discipline and which have not. When I speak to folks about their plans for their tax refunds, I urge them to resist the “spend it” impulse and instead better their long-term financial position. As boring as this may sound, the payoff can be significant.

So with our time together this week let’s look at some strategic ways to use that refund:

1. Reduce your debt

Carrying credit card debt or any other loans (auto, school, etc.) reduces your monthly income. While many of us need to use debt to finance large purchases, it’s important to use it wisely so that we aren’t wasting money on interest payments for a debt that drags on for years. Even making small payments beyond the minimum due can help pay down the balance faster.

The average APR on new credit card offers in April was 17.67%, according to, and rates are on the rise. Credit cards represent the highest-interest debt for many of us. If you are carrying credit card debt or other high-interest debt, you may want to focus on paying this off first. Look at it this way: Your credit card interest will accrue significantly faster than the interest you may earn if you save or invest. If you’re carrying large balances on those lines of credit, using your newfound wealth to pay down high-interest debt will help your money go further.

Paying down mortgage debt is also popular. There are certainly good reasons to do this, especially if you’re paying a high interest rate or if you have an adjustable rate mortgage and are concerned about rates increasing in the future. Some of my clients plan to pay down or pay off their home mortgages before they transition to retirement. When your income is typically a fraction of what you made during your working years, it’s a relief not to worry about making mortgage payments each month.

If this sounds like a good idea, well, you’re not alone. It turns out that 27% of us end up using our tax refunds to pay down debt, according to a recent survey from, so you’ll be in good company!

2. Beef Up Your Savings

Another great use for your refund? Heck, just save it! Having a cushion is crucial. Without savings, we expose ourselves to the financial risk of unexpected expenses or emergencies. Depending on the circumstances, I generally recommend having six months of expenses saved in the event of an emergency or job loss. In fact, only 29% of Americans have that much, according to a survey last year from Bankrate. Unfortunately, almost a quarter of those polled have no emergency fund at all.

If this hits uncomfortably close to home, saving your refund is an excellent idea. Even if your tax refund doesn’t get you to the six-month point, it’s a start. With that in hand, you may consider other methods to help bolster those savings over time, such as setting up a modest automatic transfer to your savings account with each new paycheck deposit.

3. Invest In You

Applying your tax refund to your retirement accounts can help get you there faster. For example, if your employer offers a 401(k) plan, now may be a good time to check your contribution amounts. For 2019, the maximum contribution amount allowed is $19,000, with catch-up contributions for those 50 and older at $6,000. If you’re not maxing out your contributions, this may be an opportunity to use your tax refund to save for retirement with the tax advantages available through retirement savings.

You might also consider using your tax refund to save for retirement using a Roth IRA instead. Roth IRAs tend to provide more freedom and choices for you to allocate your money than 401(k) plans, which are limited to the investments selected by the plan administrator. For 2019, the annual limit on IRA contributions is $6,000, with another $1,000 catch-up contribution possible for individuals age 50 or older. And generally speaking after certain conditions are met, Roth IRA contributions grow tax-free and distributions are tax-free as well.

Folks, tax time is a great time to demonstrate your savvy financial skills – especially for those getting a refund! If you’re not quite there and could use some coaching, it’s never too late to learn how to put your money to good use. Whether you plan to pay down debt, save, or invest, make sure to think strategically about how to put that money to its best use.

Be vigilant and stay alert, because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at

Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.

This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject or the article. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.

Market data and other cited or linked-to content on in this article is based on generally-available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financials Form ADV2A and applicable Form ADV 2Bs. Please contact us to request a free copy via .pdf or hardcopy.