How to Make the Most of Your Tax Refund
Your tax refund might be one of the largest windfalls you receive during the year. Here's how to make the most of it and make progress on your financial goals.
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What are some ways you can make the most of a tax refund? Should you divvy it up into separate accounts, use it to pay off high-interest debt, save it in a high-yield interest account, or save toward a long-term goal?
Financial literacy month is upon us. And along with saving more than you earn, looking at insurance options, and getting your head around money basics, you can boost your financial wellness by making the most of small windfalls like tax refunds.
Your tax refund may be one of the largest chunks of cash you get each year, so you want to make the most of it. In fact, according to the IRS, the average tax refund in 2023 was $3,140. If you anticipate getting a refund this season, here are some ways you can put it to good use:
Divide your refund into separate accounts
If your return is being direct deposited into your account, you can select a split refund, which lets you choose up to three accounts to drop your funds into. Selecting designated accounts will help you save those funds with intention. In turn, you'll have less of a chance of spending that money without purpose.
Consider dividing up your return into different savings accounts. For instance, you can put part of that money into your emergency savings fund, another toward your vacation fund, and another for a down payment on a home fund.
Pay off high-interest debt
Another way you can use your tax refund to help improve your overall financial wellness is to put it toward paying off high-interest debt— think credit cards and personal loans. This will help you knock out your debt quicker, and help you save on the overall cost of the loan.
For instance, the average APR on credit cards in 2023 hovered at 22.8%. Let's say you have $5,000 of credit card debt with a 22.8% APR, and paid it off in five years, your monthly payment will be $140.38 and you'll pay a grand total of $3,422.70 in interest fees alone. If you're able to put a chunk of that tax refund toward your credit card balance, and it takes you only two years to pay off instead of five, you'll pay $1,272.89 in interest, which saves you $2,1,49.81.
Put it in a high-yield savings account
A high-yield savings account (HYSA) can help you grow your money faster. Typically, it features a higher-than-average interest rate than with a standard checking account. For instance, the current national average for a savings account is 0.46%, while some HYSAs feature APRs that are 5.0%, if not higher.
Besides a high-yield savings account, you can park those funds into a certificate of deposit (CD). The main difference between a HYSA and a CD is that a CD requires you to commit to locking in your funds for a set amount of time. Once the term ends (aka the CD matures) you can either pull out the funds or roll it over into a new CD. If you need to pull out the funds preemptively, you'll be required to pay an early withdrawal penalty.
Save for a long-term goal
You can also put some of that tax refund toward a long-term financial goal, such as saving for your kids' higher education or aspirations post-high school, toward a down payment on a home, or maybe toward your wedding.
Whatever the goal is, it's helpful to name your savings goals and assign them target dates and amounts. For instance, maybe you want to stash aside $40,000 for a down payment on your second home in the next five years.
Bottom line
While there's certainly nothing wrong with enjoying some of that tax refund in the here and now, it's also a good idea to make the most of your refund so it helps propel your financial goals forward.
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Jackie Lam is a personal finance writer whose work has appeared in Salon, Business Insider, and GOOD.