If you’ve filed your taxes and plan to receive a refund from the IRS, you’re probably wondering what to do next. Before you go shopping with the extra money, we'll explore smart ways to make the most of your tax refund and set yourself on the path to financial freedom.
1. Build an Emergency Fund
The first and most important step to achieving financial freedom is to save $1,000 for emergencies. This can help you cover unexpected costs in cash rather than putting these expenses on a credit card, which will cost you more in interest in the long run.
2. Pay Down Debt
A simple way to take down debt is to make your tax refund a part of your debt snowball plan. The debt snowball method can help keep you motivated by paying off your debt with the lowest balances first and using that momentum to pay off your remaining debt.
Plus, putting your tax refund toward your smallest debt balance and paying it down can help you save on interest over time.
3. Invest in Your Future
No matter what age, there’s no better time to save for retirement. Whichever retirement account you contribute to, whether it’s a 401(k), 403(b), or IRA, investing your refund can help your money grow over time. The earlier you start investing, the more you can potentially accumulate through compound interest – you’ll thank yourself later!
4. Save For Your Goals
If you’re looking to purchase a home or save up for a new car, paying yourself first by saving your tax refund can help you reach your goals faster. Another savings option is to invest your tax refund in a CD (Certificate of Deposit) with a premium rate. This is a secure way to steadily grow your savings, and you can earn even more on your money than a typical savings account. Let’s look at an example.
According to the IRS, in 2023, the average tax refund received was $2,753.
If you open an 18-Month CD Special that earns 4.50% APY*, by depositing your full tax refund, you could earn a total of about $188 in interest, resulting in a total balance of $2,941.
That may not seem like a lot at first, but you could potentially earn almost $200 in free money.
See how much you could earn with our free CD Growth Calculator.
5. Live Generously
Generous living – and giving – can make an extraordinary difference in the lives of others. By making a charitable donation with your tax refund, you can support causes that make a difference in the community. Supporting causes that you care about not only makes a positive impact but may also lead to additional tax benefits in the following year.
Rather than looking at your tax refund as an unexpected bonus, the key is to make intentional and informed decisions to help you reach your financial goals. By using your tax refund strategically, you can set the stage for long-term financial success and well-being.