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A tax refund is often a big sum of money. Here’s how you can use it to accomplish important financial goals.
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As of March 24, 2023, the average tax refund sent for this filing season is $2,903, according to the IRS. If you’ve filed your taxes and are due a refund, you’ll have some choices to make. When this big sum of money hits your checking account, you’re going to have to decide what to do with it.
The best option is to use your money to increase your financial security — especially as, for most people, it’s rare to get thousands of dollars all at once that isn’t already earmarked to cover essential bills. But, exactly how you should do that depends on the current state of your finances.
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To help you decide, here are some tips for how you should spend your tax refund dollars.
Pay off high-interest consumer debt
If you have high-interest consumer debt, using your tax refund to pay it down — or pay it off — could be your best option. This includes things like credit card debt or payday loans or any loans with any interest rate above the return on investment (ROI) you could likely get from a safe investment.
If you can reduce the balance on this debt, you can lower your total repayment costs over time since you won’t be paying interest on as large of a balance. And if you can get your debt paid off entirely, you’ll free up the money you were previously using for your monthly payments to do other things with it.
Put some cash into an emergency fund
If you have your high-interest debt paid off, the next best option is to use your tax refund money to help yourself avoid debt in the future — and to help gain some peace of mind. You can do this by putting the tax refund money into an emergency fund.
Ideally, you should have an emergency fund that could cover three to six months of living expenses so you could weather almost any storm life sends your way. Saving your tax refund can help you get closer to that point even if it doesn’t quite put you there. Even if you’ll still be a long way from having the recommended emergency fund, having a few thousand dollars in the bank will allow you to be prepared for many of the surprise expenses you’re likely to face.
Fund short-term and long-term financial goals
If you don’t have expensive debt and you already have emergency savings, then you can use your tax refund to fund other short-term or long-term goals. For example, you could save the money for a big upcoming vacation or wedding so you don’t have to borrow for them. Or if you aren’t investing enough in a retirement account, you could use the money for that.
What you generally want to avoid is just depositing the money in your bank account or using it on a whim to make a big purchase you hadn’t planned. Instead, by being purposeful about what goals you want to accomplish with it, you can make the most of the lump sum payment the IRS is sending to you.
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