You may have already received your tax refund — or you will soon. In 2024, the IRS expects the average tax refund to be about $3,100. That’s a pretty good chunk of change, and it makes smart financial sense to make the most of it.
When the check arrives or is automatically deposited in your bank account, it can be tempting to indulge in dinners out, add an extra streaming service, or buy presents for everyone in the family (and all of your friends, too). Before you think up a million more ways to spend your refund, consider these seven ways to invest in yourself— and your future — instead. You’ll be happy you did.
1. Use your tax refund to build an emergency fund
An emergency fund is money you set aside for unexpected expenses, such as hospital bills, car repairs or as a buffer if you lose your job. According to the 2023 Stress in America study published by the American Psychological Association, 77% of Americans aged 35 to 44 say that money (or lack thereof) is a main source of stress. Earmarking funds from your tax refund to be put into an emergency fund can ensure the money is there when needed.
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Naturally, if you’re living paycheck to paycheck, like the nearly 61% of respondents in a 2023 PYMNTS survey, even $10 per week set aside for savings may seem too much. This is especially true when you consider that the same survey showed that 21% said their income doesn’t even cover their standard expenses.
The best way to set up an emergency fund is to have a portion of each paycheck go directly into a savings account via direct deposit. The money you set aside from your tax refund can come in handy if your refrigerator gives out.
2. Pay down debt
There's nothing exciting about paying down debt. That is until your statement shows it has been paid in full. What a sense of relief and accomplishment. Total household debt rose by $212 billion to reach $17.5 trillion in the fourth quarter of 2023, according to the latest Quarterly Report on Household Debt and Credit by the Federal Reserve. Carrying around that much debt can be stressful.
While your tax refund may not pay off a loan or loans, using it to make a payment to pay down a loan is an excellent option if you stand to save money on interest, your credit score needs a boost, or you want to improve your mental health by lowering your debt and reducing your monthly payments.
3. Pay down student loans
Although President Biden recently canceled debt for 277,000 student loan borrowers in addition to the debt cancellation in March for 77,000 borrowers, not all students or loans qualify. If you have private student loans or don’t qualify for help, using all or part of your tax refund can help.
The cost of college has more than doubled over the past 40 years, and student loan debt has increased by 66% over the past decade, now totaling more than $1.77 trillion, according to the Federal Reserve.
One way to make a dent in high student loan balances is to use your tax refund to make an additional payment. There’s usually no penalty for making extra payments, and you’ll save money by paying less in interest over time. Just be sure you carefully document any extra payments you make, and that they are reflected in your next loan statement.
4. Pay down credit card debt
At the end of 2023, credit card debt rose to a record $1.13 trillion, according to the Federal Reserve. What makes that figure even more chilling is that the average credit card interest rate on accounts with balances was a whopping 20.75% on April 10, 2024, according to Bankrate.
So, if you carry a balance of $5,000, you’ll pay just over $78 in interest alone (based on the 20.75% interest rate) during your 30-day billing period. That may not seem like a lot, but interest adds up quickly. One of the best ways to use your tax refund is to pay down or pay off high-interest credit cards, especially if you're carrying high balances or you're maxed out on several cards. This rule holds true even if you're tempted to spend more on a rewards credit card to get points or miles.
5. Make a down payment on a new car
Vehicle manufacturers are offering some of the lowest interest rates and pricing incentives on new cars we’ve seen in a long time, which makes buying or leasing attractive. Plus, as of a few months ago, you can tap into the $7,500 price reduction for new electric vehicles (EVs) or $4,000 for used EVs at the dealership, instead of when filing your tax returns.
If your current vehicle is barely rambling down the road, using your tax refund as a down payment may get you more than just a new ride; you’ll also get reliability, a new warranty, new technology and additional safety features. Plus, using your refund as a down payment can help lower the overall cost of your vehicle loan.
6. Invest the funds
If you’re considering investing your tax refund in the short term, the stock market could be your best bet. But if you want to grow your money to invest in a home or car in the short term, the stock market may be too risky. Instead, consider IRAs, CDs or Treasury bills. The yields on investments like Treasury bills or CDs are higher than they’ve been in years, with many at 5% APY. That’s a good return on your tax refund investment, and you'll be making money rather than spending it.
7. Make some home repairs
If you’ve been putting off replacing old windows or carpet in your home, now may be the time to put that tax refund to good use. The IRS encourages homeowners to renovate their homes by providing tax deductions for certain types of improvements.
While some renovations don’t qualify, many are eligible if they are permanent, major renovations that add value to your home. In fact, you can save up to thousands of dollars on renovations or improvements that are energy efficient. These may include adding an energy-efficient HVAC system, energy-efficient windows or additional insulation, or modifying doorways for wheelchairs and walkers.
If you intend to sell your home soon, you might want to focus on adding the home features today's buyers want most.
When is the tax filing deadline this year?
For the first time in five years, the deadline for filing your 2023 federal income tax returns is April 15, except for taxpayers living in Maine or Massachusetts. You have until April 17 due to state holidays.
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