Getting a Tax Refund This Year? 5 Smart Ways to Use the Money

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Most Americans overpay Uncle Sam and receive a tax refund as a result. Keep reading for a few wise moves to make with yours. [[{“value”:”

According to the IRS, as of Feb. 16, the average tax refund so far is $3,207. This is a bit higher than it was at this point last year, and that amount of money could do some serious good for your finances.

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Here are a few ideas for what to do with your tax refund this year.

1. Earn interest on it

There’s never been a better time to earn a general and risk-free return on your tax refund, especially if you intend to use it for an emergency fund (more on that below). So why not use it to open a brand-new high-yield savings account?

You can find annual percentage yields (APYs) topping 5% right now, thanks to a persistently high federal funds rate. When the Federal Reserve hikes rates for banks to borrow money from each other, consumers are impacted with higher interest rates on loans and credit cards (bad), but also higher rates on deposit accounts (good).

Want to lock your money up for a while — and pause that APY in the process? Consider a certificate of deposit (CD). The 5% APY on your savings account is subject to change anytime, but if you open a 1-year CD at 5%, you’ll earn that 5% for a year. A 5% APY on the average refund of $3,207 comes to about $160 in a year, which isn’t bad.

2. Pay down debt

If you’ve got some stubborn high-interest debt, like that on a credit card, consider using your tax refund to chip away at it. I’d recommend this move over putting the money in the bank, if you have this kind of debt, because the return on investment is stellar. Think about it — if you pay off debt that’s charging interest at a rate of 20% or higher, you’re money ahead of putting it into a savings account paying 5%.

You’ll save more money on interest costs if you apply your tax refund to your highest-interest debt, but it might feel really great to knock out a few smaller balances in their entirety. So consider which move is right for you.

3. Start investing

Want to grow your tax refund even more than you can with a savings account or CD? Consider investing it in a brokerage account, be it taxable or retirement (like an IRA). Just note that investing is best done for the long term — think five years or longer.

The S&P 500 has generated an average 10% annual return over the last 50 years, but in individual years, the market’s value swings wildly. So if you’re comfortable buying stocks (or perhaps ETFs — that way, you can invest in the market overall) and riding out the small and large swings for years, investing can be a wise move.

If you received the current average refund of $3,207 and managed to earn a more conservative 8% return, your tax refund could turn into more than $6,900 over the course of 10 years. Leave it alone for 20 years, and you could be sitting on almost $15,000.

4. Pad your emergency fund

This is another smart and safe move for your tax refund. You could add that money to your emergency fund — or even start an emergency fund for the first time. Having cash at the ready for a surprise bill or unplanned expense is a wonderful thing, especially if you’ve had to resort to putting those extra costs on a credit card in the past.

Keep your emergency fund in a high-yield savings account to keep things simple. Over time, aim to build your savings to a level where you can cover three to six months’ worth of bills.

5. Splurge a little

I’m not made of stone, and I won’t insist that you do something financially responsible with every dollar of tax refund you receive. So take a portion of it (maybe 10%?) and have some fun. Depending on how much you’re getting back, that 10% could represent a nice meal, a night in a hotel, or even a sweet new piece of personal tech.

Remember, it’s not “free money” — so plan accordingly

Getting a big tax refund doesn’t mean you’re getting “free money.” Instead, it represents repayment of an interest-free loan you gave Uncle Sam. As such, it’s a wise idea to use at least some of it to improve your personal finances. After all, that cash might have saved you from debt or other hardship had you received it as part of your paychecks throughout 2023.

In fact, it’s worth working with your employer’s human resources department to change your withholding and receive more of your money during the year. You’ll just need to update your W-4 form. Think about how much good a bit of extra money in your paychecks could do, and make the income tax move that’s right for you.

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