What Should You Do With Your Tax Refund?

The thought of tax time can be stressful until you realize you’re due a refund from the U.S. government. A refund can provide you with a cash windfall that can help you financially, but you need to plan how best to use this money.

Tax refund stats

The Internal Revenue Service reported that the average tax refund during the 2024 tax season came in at $3,221, a sizable amount.

National credit bureau Experian surveyed taxpayers who were scheduled to receive one of these larger refunds to see what they planned to do with the money.

Experian found that:

• 31% of respondents said they planned to save their tax refund dollars.
• 21% said they planned to use the money to pay down debt.
• 21% said they would use it to cover everyday expenses and necessities.
• 10% said they would invest their refund money.
• 9% said they planned to splurge on a big purchase.
• 7% said they would use their refund to help pay for home improvement projects.
• 3% said they would use it to help fund a major purchase such as a new car or home.

What should you do with your tax refund dollars?

The best use for your tax refund depends on your financial situation.

If you have thousands of dollars of high-interest-rate credit card debt, you might use your refund to pay that down. Credit card debt can grow quickly because of the high interest rates that providers charge. Paying down that debt can save you a significant amount of money in the long term.

You can also use your money from the IRS to build an emergency fund, a stash of dollars that you can draw from when you face unexpected expenses. Most financial experts recommend that you have enough money in an emergency fund to cover three to six months of daily living expenses. A big infusion of cash from a tax refund can help you build or grow an emergency fund quickly.

If your finances are in good shape, you can invest your tax refund. That way, you can earn money on the dollars you receive from the government.

Don‘t bank on an annual refund from the IRS

You might celebrate a big tax refund, but you really shouldn’t. A large tax refund means that you’ve loaned your money to the U.S. government during the year, all without receiving any interest on your loan.

A big tax refund is often a sign that you are withholding too much money from your paycheck. If your tax refund is $1,000 or more every year? It’s time to speak with your payroll department at work to lower the amount that you are withholding.

It makes more financial sense to have access to your money throughout the year, when you can put it to better use, than to wait each year for a tax refund from the IRS. Remember, your goal should not be to get a big tax refund every year. You can then use that money during the year as you wish.