Should You Invest Your Tax Refund This Year?

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Got a tax refund? Read on to see if investing it makes sense. 

At this point, a lot of people who filed their taxes on time are starting to see their refunds hit their bank accounts. The average tax refund as of April 21, 2023 is $2,753, according to the IRS. If your refund is comparable, it means you might have a fair amount of money to work with.

But should you invest your refund, or use it for something else? Ask yourself these questions to find out.

1. Am I keeping up with my bills?

Investing your tax refund is a great way to grow that money into a larger sum over time, so you may be eager to add it to your brokerage account. But before you do that, assess your current financial situation.

Are you managing to pay your bills in full, or have you fallen short on a few in recent months? If you’re struggling to keep up with your expenses, and there aren’t any you can cut, then you may want to keep your tax refund in your checking account and use it to cover your essential expenses.

2. Do I have a fully loaded emergency fund?

It’s really important to have a large enough savings account balance to cover three full months of essential expenses. That way, if you were to lose your job, you’d have a way to pay your bills while looking for work. That’s also money you’d be able to tap in the event of an unplanned expense, like a home or vehicle repair.

If you don’t have enough money in the bank to cover three months of essential expenses, then rather than invest your tax refund, you should really save it instead. If you don’t, you might end up with costly debt if something in your life goes wrong, whether it’s your job disappearing, your car failing to start, or your roof springing a leak.

3. Do I have high-interest debt?

You don’t necessarily need to use your tax refund to pay off a mortgage loan with a 3.5% interest rate attached to it. In fact, these days, you might get a higher return on your money than 3.5% simply by keeping it in the bank.

But if you’re carrying a balance on one (or more) of your credit cards, then it makes sense to use your refund to pay it off rather than invest it. Over the past 50 years, the stock market, as measured by the S&P 500 index, has delivered an average annual return of 10%. But your credit card might be charging you twice as much interest. If that’s the case, you’re better off eliminating your outstanding balance rather than using your tax refund to buy stocks.

Investing your tax refund is a great way to turn it into a lot more money over time. But ensure that makes sense for your financial situation. It’s more important to make certain your bills are payable, you’re covered for emergency expenses and situations, and you’re out of credit card debt than to stick that money into a brokerage account and hope it does well.

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