Just like you, famed investor and Berkshire Hathaway CEO Warren Buffett dutifully files his taxes every year — a practice he started at just 13, when he owed $7 on the earnings from his paper route.
The average individual federal tax refund so far in the current filing season is about $2,900, according to IRS data.
While that’s a drop in the bucket for Buffett, the folksy businessman knows that amount of money can make a huge difference for the average American household. While he has some helpful advice on how to lower your tax bill, his expertise also extends to how you should spend your refund.
The wisest way to use tax refunds, according to Buffett
Buffett says whenever you come into any extra money, your first move should be to pay off credit card debt. While he says “the world is in love with credit cards,” they’re far too expensive.
During Berkshire Hathaway’s first-ever online annual shareholders meeting last year, Buffett shared a story about a friend who’d recently come into some money and sought his advice on how to spend it. As it turned out, she also had credit card debt, on which she was paying 18% interest.
While Buffett says he understands many Americans are relying on credit cards to get them through the pandemic, it seems like some people think of their plastic as “a piggy bank to be raided.”
“If I owed any money at 18%, the first thing I’d do with any money I had would be to pay it off,” Buffett said he told his friend. “You can’t go through life borrowing money at those rates and be better off.”
But what if your tax refund isn’t enough to pay off all of your credit card debt? You could make your remaining balances more affordable by rolling them into a lower-interest debt consolidation loan.
Buffett would not say to use your refund for your mortgage
Buffett is passionate about avoiding carrying a balance on your credit card: “It just doesn’t make sense,” he said during the virtual shareholders meeting.
But that’s not to say he thinks all debt is bad — in fact, he wouldn’t suggest you use your refund to pay down your mortgage.
Buffett took out a 30-year mortgage in 1971 when he bought a vacation home in Laguna Beach, California, even though he could easily afford to pay for it in cash.
In a 2017 interview with CNBC, he called the 30-year mortgage “an incredibly attractive instrument for the homeowner.”
Fast forward to 2021, that still rings true as mortgage rates are still at historically low levels.
Buffett says his home loan made good financial sense: “I thought I could probably do better with the money than have it be an all-equity purchase of the house,” he told CNBC.
No credit card debt? Then invest your refund
So what did he do with the cash he would have used to buy the house outright? He bought stock in his own company. Buffett bought around 3,000 shares of Berkshire Hathaway at about $40 each — and by the time of the 2017 interview, that investment had grown to $750 million.
If you don’t have credit card debt or other pressing needs to cover with your tax refund, follow the Oracle of Omaha’s lead: Consider investing whatever you get back from the tax agency. You could even buy into Berkshire Hathaway.
Berkshire stock has reported average annual returns of more than 20% since the 1960s, versus just 10% for the S&P 500, according to multiple media outlets.
Buffett has never split his company’s Class A shares (BRK.A), so the stock is notoriously pricey — now just over $400,000 per share. But you can still grab a “slice” of stock with a popular investing app, that allows you to buy “fractional shares” based on what your budget allows.
Another way to make some your refund money work for you is by opening an account with an app that allows you to build your portfolio using “spare change.” When you link the app to a credit or debit card, your everyday purchases are rounded up to the nearest dollar — and the difference is added to your investment account.
