Listen, we’ve all been there.
Your tax refund hits your account and suddenly you’re dreaming about that designer bag you’ve been eyeing (for me, it’s the Medium Lady Dior Cannage Lambskin Bag in Latte) or that all-inclusive trip you’ve been wanting to take to Tulum. But let me keep it real with you – that refund check isn’t free money. It’s your money that you’ve been lending to Uncle Sam interest-free all year long. And now that it’s back in your hands, it’s time to make it work for you.
The average tax refund in 2024 is hovering around $3,000, with only 40% planning to put it into savings according to Credit Karma’s recent tax survey. That’s not just shopping money – that’s investment potential. That’s generational wealth building potential. That’s a down payment towards your “FU” money account.
“We consistently see it trending close to that amount year over year,” says Lisa Greene-Lewis, CPA and tax expert with Intuit TurboTax. “For many tax filers, it is the biggest check they get all year and they look forward to the large lump sum to do things like pay down debt or cover a big expenditure.”
But the real flex is how you make your money work for you. She continues, “People can use the lump sums to create an emergency fund or invest in their retirement especially given the current environment.”
So before you hit ‘add to cart’ on that wishlist you’ve been building, let’s talk about how to flip that refund into something that’ll keep paying you back.
Pay Yourself First
“To truly maximize your refund, you want your money to work for you once it hits your account,” says Greene-Lewis. So if you don’t have an emergency fund, this is where you need to start. Financial advisors typically recommend having 3-6 months of expenses saved up, but don’t let that number intimidate you. Start with putting aside $1,000 of your refund into a high-yield savings account.
“It’s one way to make your hard-earned money work for you, with little effort. It’s not uncommon to get a shockingly low interest rate (e.g., .01%) on a traditional savings or checking account, while interest rates on high-yield savings accounts can be higher.
Greene-Lewis offers a few key tips for those who don’t know where to start when searching for a high yield savings account: The annual percentage yield (APY) will tell you the percentage of interest you should earn in a year, so you’re looking for a strong yield. Ideally, you’re avoiding costly fees, like monthly maintenance, transfer, or withdrawal fees, or a minimum balance to open the account. You want easy access to your money so you can use it when you need it.
And, as with any financial product, shop around. Don’t sign up for the first savings account you see. Understand the terms of the account before you open one, so you aren’t hit with surprise fees down the line.
Invest in Your Future
If you’ve got your emergency fund looking right, it’s time to think bigger. Consider maxing out your Roth IRA contribution for the year (the limit is $7,000 in 2024 if you’re under 50). Why a Roth? Because you’re paying taxes now so you don’t have to pay them later when you withdraw in retirement. And trust, future you will thank present you for this move.
For those who are new to investing, consider low-cost index funds that track the S&P 500. These funds give you exposure to 500 of America’s largest companies, and historically, they’ve provided solid returns over the long term.
Clear High-Interest Debt
I know it’s not sexy, but if you’re carrying credit card debt with those crazy 20%+ interest rates, using your refund to pay it down is literally giving yourself a guaranteed return on investment. Think about it – if you’re paying 24% interest on credit card debt, paying it off is like earning a 24% return.
Show me another investment that can guarantee that kind of return.
Start That Side Hustle
Maybe you’ve been sitting on a business idea but needed startup capital. A tax refund can be seed money for that online store you’ve been dreaming about, or it could pay for that certification that’ll let you charge more for your services. Just make sure you’ve got a solid plan before you invest.
“The money you invest in your business may be deductible since you can deduct expenses directly related to your business including start up costs,” says Greene-Lewis. “You can deduct expenses like equipment, your car expenses directly related to your business, business travel, marketing, advertising, website development and maintenance, and your home office.”
You can also invest in yourself and take a credit for college or trade courses. If you are working on a four year degree at a college you may be able to take the American Opportunity Tax Credit up to $2,500.
Level Up Your Skills
Sometimes the best investment is in yourself. That refund could cover the cost of courses that’ll make you more valuable in your field. Whether it’s digital marketing, project management, or coding bootcamp, upgrading your skills can lead to higher earning potential.
The Bottom Line
Look, I get it. The temptation to treat yourself is real, and I’m not saying you can’t use any of your refund for something fun. But maybe instead of blowing the whole check, set aside 10-20% for enjoyment and put the rest toward your financial future.
Remember, building wealth isn’t about making one perfect move – it’s about making consistently smart decisions with your money over time. Your tax refund is one of those opportunities to make a smart move. Don’t waste it.
And if you’re getting a big refund every year? Talk to a tax professional about adjusting your withholdings. You might be better off getting that money in your paycheck throughout the year instead of giving the government an interest-free loan.