What do birthday cards from your relatives and tax refunds from the IRS have in common? You know there’s cash inside, but how much?
Getting a tax refund usually feels like being given free money but remember that’s your hard-earned income coming back to you! So instead of letting it slip through your fingers on spontaneous spending, consider channeling it towards key financial goals.
Build or rebuild your emergency fund.
An emergency fund should be tailored to your specific financial situation. When deciding how much you need, you should consider your monthly living expenses, the stability of your income, and your overall debt payoff journey/strategy. Following the Dave Ramsey Method? Start with $1,000 in an emergency fund until you’ve paid off all your debts (excluding your mortgage) and then aim for 3-6 months of expenses. Once you’ve defined your goal, your tax refund can provide a helpful boost towards achieving it. If you’ve had to use your emergency fund recently, don’t forget to prioritize replenishing it.
Pay off high interest debts like credit cards.
According to Investopedia’s tracking of 300 credit cards, the median average CC interest rate for March 2025 was 24.2%.1 Gasp! Groan! Wail! (and all the other onomatopoeias used to express horror and disgust!) If you carry a balance on your credit card and your tax refund can help then by all means, pay it down. However, if you have a habit of building up a balance on your card(s) all year that you then pay off completely every tax season, I suggest you take a moment to reflect on this pattern. How can you modify your budget or spending habits to reduce your reliance on this annual bailout?
Save it in an interest earning account.
Whether you’re saving up for a downpayment, a family trip, or getting a jump on planning for the holiday season, an interest earning account like a high yield saving account or money market account are great for putting your money to work until you’re ready to use it.
Boost Your Retirement Fund.
You just did your taxes, so you know whether you maxed out your retirement contributions for the previous year. If you didn’t, and you feel comfortable with the state of your emergency fund and debts, then consider using your refund by adding it to your Traditional or Roth IRA account. Do the research to find out which account is best for your situation first to make the most of your retirement savings.
Let’s get one thing straight, I’m not against sweet little treats. I’m simply suggesting this year you downsize your usual tax refund reward to a fancy cupcake or bag of nice coffee beans and use the rest to get a step closer to your financial goals.
All the best,
Chandler
1 Woolsey, Ben. “Average Credit Card Interest Rate for March 2025: 24.20% APR.” Web log. Investopedia (blog), March 7, 2025. https://www.investopedia.com/average-credit-card-interest-rate-5076674.