7 of the Best Things to Do With Your Tax Refund
Your tax refund can be a decent chunk of change — the average federal refund came in just under $2,800 in 20231 (for tax year 2022). What you should do with it can be a challenge for some. Luckily, there are a number of excellent options for how to use your refund money wisely to further your financial growth and goals.
One note before diving into your refund options: remember that your tax refund is your money. There is value in spending your refund on a trip, a new gadget, or any number of fun things that aren’t normally in your budget.
For those who are interested in putting some (or all) of your refund towards advancing long-term financial goals, check out the following DCU recommendations.
1. Pay Off Debt
A quick way to improve your overall financial health is to use your tax refund on paying down your debt. Even if you’re unable to pay off all of your debt with your tax refund, by knocking down a significant portion, you’ll reduce the amount of interest paid over time and potentially lower your monthly payments.
Some of the most common debts people apply their refunds to include:
- Credit cards
- Mortgages
- Car loans
- Payment plans for large appliances
- Bills
Debt Payment Strategies
There are a few effective strategies when it comes to paying down debts, especially if your refund is large enough to wipe out a balance or two completely. One option is to find the debt that has the highest interest rate and pay it off completely – or pay off as much of it as you can. Reducing a balance with a high rate of accumulating interest is a great way to save money in the long run.
Another good option, especially if you are energized by building momentum and seeing progress right away, is to use the snowball method. Pay off the debt with the lowest balance first and then apply your refund — and the money you had allocated towards that newly paid debt — towards your next lowest balance.
2. Save Toward a Specific Goal
Using your tax refund to save for large purchases, like buying a vehicle, a down payment for a home, travel, a wedding, or any other expense that may take years to save for is a wise way to speed towards your savings goal. Even better — put that money in a high yield savings account and get to your goal even faster.
Make your money work for you — save faster with a DCU high yield savings account
3. Create or Feed Your Emergency Fund
Preparation can not only help you save for the unexpected in the future, it can also give you the benefit of peace of mind in the present. An emergency fund is one of the most practical ways you can use your tax fund to prepare for the future. As a general rule, an emergency fund should be able to cover all of your expenses for six months in case of a lost income. By using your tax refund, you can easily create or fill up your emergency fund.
An emergency fund is also well suited to a high yield savings account, giving your rainy-day funds a chance to work for you before you need them.
4. Retirement Fund
For those inclined to look further into the future, putting money towards long-term goals like retirement can be one of the best things you can do with your tax refund. Adding a sizable sum of money like a tax refund to your retirement account now will allow you to take advantage of compounding interest for years to come.
Explore your retirement account options with DCU and help secure your future today.
5. HSA
If you have healthcare expenses coming up in your future or if you want to ensure you have money set aside for any unforeseen medical costs, adding money to your HSA can be a great use of your tax refund. An HSA will allow you to save and spend money, tax-free, on qualified medical expenses. Another benefit is that the fund will never expire, so you’ll have access to a growing balance to use for medical expenses for years to come.
6. Build Equity in Your Home
Whether you’ve been dying to get started on some remodeling, or you just want to boost your home’s equity, a renovation is a great way to use your tax refund. While you may not be able to redo your entire kitchen with just your tax refund, it’s likely you can tackle a smaller scale project with it.
Another option is to use your refund to pay for a portion of a larger renovation, and use a home equity loan or home equity line of credit (HEL/HELOC) to finance the rest. By using your refund to decrease the amount of credit you use on a big project, you can save a significant amount of money in the long run.
7. College Funds
Investing in education is always a smart move. By putting your tax refund towards your child(ren)’s college tuition you’ll give them a head start on reducing the debt they take on during their education. You can also use specific allocated account — like DCU’s Coverdell Education Savings account — that allow the beneficiary to spend the money tax-free on qualified education expenses.
Put Your Refund to Work With DCU
There are plenty of options for getting the most out of your tax refund, whether you are saving for decades in the future or want to take care of more immediate concerns. DCU has the expertise and resources to help make your money work for you in the best way possible, so apply for membership or open a new account today.
1Source: https://time.com/personal-finance/article/average-tax-refund/
Please note, membership is required to open a DCU Checking or Savings Account. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
