Smart Moves for Your Tax Refund

During tax season, many Americans eagerly anticipate their refunds. However, the real opportunity lies not in the windfall itself, but in how you choose to use it. Recent data from the IRS shows that the average tax refund for the current tax season is approximately $2,169. (1) Let’s explore how to use your tax refund wisely. 

Before we dive into strategies, let’s consider some eye-opening statistics. According to TransUnion’s Consumer Pulse Q4 2023 report, Millennials are leading a shift towards more prudent financial behavior. 35% are boosting their emergency funds, 29% are accelerating debt repayment, and 28% are increasing their use of available credit. This trend towards savings and debt management is one we should all consider emulating. (2) 

Step 1: Assess Your Current Financial Situation – Help Attack High-Interest Debt 

First and foremost, take a hard look at your debt. Do you have any high-interest credit card debt? If so, consider prioritizing this. Credit card interest can compound quickly, turning a small balance into a major financial burden.    

• Why it matters: Paying down high-interest debt provides an immediate return on your investment by reducing future interest payments.    
• Action: Consider allocating as much of your refund as possible to eliminate or significantly reduce this debt. 

If you’re debt-free (congratulations!), or once you’ve tackled the high-interest debt, proceed to step two. 

Step 2: Build or Replenish Your Emergency Fund – Help Create a Safety Net 

Life is unpredictable. Unexpected expenses like medical bills, car repairs, or job loss can derail even the most carefully laid financial plans. That’s where an emergency fund comes in.    

• Why it matters: A fully funded emergency fund (ideally 3-6 months of living expenses) provides a crucial financial safety net.    
• Action: If your emergency fund is lacking, consider dedicating a significant portion of your refund to building it up. 

Step 3: Address Existing Debts – Strategically Help Reduce Your Burden 

Beyond high-interest credit card debt, you might have other outstanding obligations, such as student loans or car loans. 

• Why it matters: While these debts may have lower interest rates, paying them down can free up cash flow and reduce your overall debt burden. 
• Action: Consider allocating a portion of your refund to these debts, focusing on those with higher interest rates or those that are causing you the most financial stress. 

Step 4: Invest in Your Future – Secure Your Long-Term Goals 

With your immediate financial needs addressed, it’s time to focus on your long-term goals, such as retirement. 

• Why it matters: Investing early and consistently is crucial for building wealth and achieving financial security.    
• Action – Consider the following: 

• • If you have children/grandchildren who plan to pursue further education, explore 529 plans. 
  • If you’re not on track with your retirement savings, consider contributing to an IRA or 401(k). 
  • If you have other long-term financial goals, create a dedicated savings plan. 
  • If you are on track, consider further investments that align with your risk tolerance, and consider saving for experiences or items that enhance your well-being. 

Always keep in mind that investing involves risk, including possible losses. Working with a financial professional can create a customized strategy that aligns with your goals.  

Step 5: Discretionary Spending – Enjoy Your Rewards (Responsibly) 

After addressing your essential financial needs, you might have some funds remaining. 

• Why it matters: It’s important to enjoy the fruits of your labor and reward yourself for your financial discipline. 
• Action: Consider allocating a portion of your refund to discretionary spending, such as home improvements, travel, or other personal goals. However, be mindful of your budget and avoid overspending. 

Key Considerations 

• Prioritize high-interest debt and emergency savings above all else. These two steps can provide immediate financial relief and security. 
• Consider using the IRS’s split refund option. This allows you to divide your refund among different accounts, making it easier to allocate funds for various financial goals. 
• Remember, this decision tree is a guide, not a rigid rule. Your unique circumstances should always guide your financial decisions. 

Taking Control of Your Financial Future 

Your tax refund presents a valuable opportunity to strengthen your financial foundation. By approaching it strategically, you’re not just managing money – you’re potentially investing in your future security and confidence. 

The choices you make today can have a profound impact on your financial well-being for years to come. Whether it’s eliminating high-interest debt, building a robust emergency fund, or investing in your long-term goals, each decision is a step towards potential greater financial stability and freedom. 

Don’t wait – start planning how you’ll use your tax refund to help build a stronger financial future today. Your future self will thank you for the smart decisions you make now. 

Sources: 

(1) “Concerned 2025 Tax Refunds Are Lower than Last Year? This Is the Reason Why the Average IRS Check Is Smaller.” AS USA, 2025, en.as.com/latest_news/concerned-2025-tax-refunds-are-lower-than-last-year-this-is-the-reason-why-the-average-irs-check-is-smaller-n/. 

(2) TransUnion. “Consumer Pulse Q4 2023.” TransUnion, 2023, www.transunion.com/report/consumer-pulse/q4-2023 

Diversification does not guarantee profit nor is it guaranteed to protect assets. Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or protect against losses. This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues. We do not provide tax or legal advice or services. Always consult with qualified tax and legal advisors concerning your circumstances. We are not affiliated with or endorsed by any government agency and do not provide tax or legal advice or services.