Are you getting a tax refund this year? 5 ways to spend your money wisely

According to the Internal Revenue Service (IRS), the average tax refund amount as of February 16 was $3,207. That’s slightly higher than it was at this point last year, and that amount could provide a serious boost to your finances.

Related: best tax software

Here are some ideas on how to handle your tax refund this year:

1. Earn interest

There has never been a better time to get regular, risk-free returns on your tax refund. This is especially true if you plan to use those tax dollars as an emergency fund (more on that below). So why not use it to open a new high-yield savings account?

Thanks to the persistently high federal funds rate, annual percentage yields (APY) are now over 5%. When the Federal Reserve raises interest rates to force banks to borrow from each other, consumers are affected by higher interest rates on their loans and credit cards (bad) and higher interest rates on their savings accounts (good).

Want to freeze your funds for a while and pause your APY in the process? Consider a certificate of deposit (CD). The 5% APY on a savings account can change at any time, but if you open a one-year CD at 5%, you’ll earn that 5% for one year. At 5% APY, the average refund of $3,207 works out to about $160 per year, which isn’t bad.

2. Pay off your debt

If you have high-interest debt, such as credit cards, use your tax refund to pay off the debt. If you have this type of debt, we recommend this action over putting your money in the bank because the return on investment is excellent. Think about it. If you pay off debt that charges 20% or more interest, you have money ahead of you putting it in a savings account that pays 5%.

Applying your tax refund to your highest-interest debt can save you more money in interest costs, but it can feel really good to eliminate a few smaller balances overall. So think about which course of action is right for you.

3. Start investing

Want to stretch your tax refund further than you can through a savings account or CD? Consider investing in a brokerage account that is taxable or has a retirement savings (such as an IRA). Remember that investing is best done for the long term. Think over 5 years.

The S&P 500 has returned an average of 10% per year over the past 50 years, but market value fluctuates significantly between individual years. So, if you’re comfortable buying stocks (or ETFs, etc.) and can invest in the market as a whole and ride out big and small fluctuations over the years, investing can be a smart move.

If your current refund averages $3,207 and you earn a more conservative 8%, your tax refund could grow to more than $6,900 over 10 years. If you leave it for 20 years, you could earn almost $15,000.

4. Fill up your emergency fund

This is another smart and safe move for your tax refund. You can add that money to your emergency fund or start an emergency fund for the first time. It’s a good idea to have cash on hand for unexpected bills or unplanned expenses. This is especially true if you’ve had to put extra money on your credit card in the past.

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

5. Show off a little

I’m not a natural, and I’m not going to advocate doing the fiscally responsible thing for the tax refund you receive. So take some of it (maybe 10%?) and have fun. Depending on how much you get back, that 10% could be a delicious meal, a night at a hotel, or even new personal technology.

Remember, it’s not “free money.” So, plan accordingly.

Getting a big tax refund doesn’t mean you’re getting “free money.” Instead, it means repaying the interest-free loan you gave Uncle Sam. So it’s a smart idea to use at least some of it to improve your personal finances. After all, if you had received that cash as part of your paycheck throughout 2023, it may have saved you from debt or other hardships.

In fact, it may be a good idea to work with your employer’s human resources department to change your withholdings and receive more money for the year. Simply update your W-4 form. Think about how a little extra money in your paycheck could help and figure out what income taxes are right for you.

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