5 Smart Money Moves to Make Using Your Tax Refund

February 10, 2022
5 Smart Money Moves to Make Using Your Tax Refund

With tax-filing season in full swing, if you’re expecting a refund and plan to submit your taxes electronically, without errors, and using direct deposit, the IRS says your refund could arrive within three weeks. With last year’s average federal tax refund topping $2,800, you may already be thinking about how you can make the most of money coming back to you this year.

5 Smart Ways to Use Your Tax Refund

Here are five of our favorite strategies for how to use your tax refund in 2022.

1. Add to your emergency fund.

Given that unexpected financial setbacks will occur—a blown water heater, a major medical bill, an expensive car repair—having a well-stocked emergency cash reserve can help keep you afloat or out of unnecessary debt.

One of the tried and true ways to build your emergency savings is to fund it slowly over time with monthly automatic contributions. By using your tax refund to make a large lump sum deposit, you’ll reach your goal much faster.

How to save it: Assuming you regularly contribute $100 a month and your target balance is $5,000, it will take you four years to get there. Next, let’s assume you receive last year’s average federal tax refund of $2,800. If you continue making regular contributions and deposited your entire tax refund directly into your emergency savings fund account, you’d reach your target savings goal in just under 2 years.

> ProTip: How big should your emergency fund be? Find out using this easy calculator from Money Under 30.

2. Pay down debt.

How would it feel if you could knock out a debt that’s been hanging over your head for far too long? Or what if you could take a bite out of an overwhelming credit card balance? When you use your tax return to pay off debt faster, you can save yourself years of worry and potentially thousands of dollars in accumulated compound interest with this creative way to pay off debt.

How to spend it: Suppose you typically pay the minimum owed ($200 for example) toward an outstanding $5,000 credit card balance. Assuming a 15% interest rate on that card, and that you don’t add any more to it, you’ll be paying off that card for six and a half years, and shelling out $2,900 in interest before you’re done.

Instead, what if you applied your $3,000 tax refund to that debt while continuing to pay the monthly minimums? You could be debt-free in about 2 years and save yourself more than $2,500 in interest payments. Now that’s progress.

> ProTip: If you want to see how much time and money you can save by making a lump-sum payment toward your debt, punch your numbers into Student Loan Hero’s Extra Payment Calculator.

> ProTip: Need to tackle even more of your debt than your tax refund can handle? Try bridging the gap with a personal loan that can transfer balances for you.

3. Upskill your income.

With today’s post-pandemic job market on fire across most sectors, fine-tuning your skills and taking a look around for better opportunities can mean more money in your pocket. The rewards of being more effective in your current line of work, more confident when you ask for that raise, or positioning yourself for a better, higher-paying role, is an investment that can pay you back many times over.

How to spend it: Whether you field customer service calls, write code, or clean homes for a living, consider spending part of your tax refund improving core job skills. Or, try learning something new altogether. This could mean paying someone to rewrite your resume, going back to school to obtain a special certification, or buying the tools you need to improve your work productivity. No matter what, investing in yourself and improving your skills can help you increase in your future earning potential.

> ProTip: Read more about the skills most worth learning in 2022.

4. Reach a big goal faster.

You probably have several medium-to-long-term goals for your cash, such as:

If you’ve prioritized building a strong financial foundation, most likely you already have a plan in place to reach one or more of your dreams. And when you pour any tax refund dollars directly into your savings goal, you’ll get there much faster.

How to make it happen: If your goal is savings, opening a dedicated, high-yield savings account, certificate of deposit, or money market account is a good way to safely grow your dollars while keeping them within easy reach. If your goals include planning for retirement or putting money away for future use, look into specialized accounts that offer tax benefits such as an IRA or a custodial account to grow your cash for your children’s future expenses.

5. Invest, and fight inflation.

If you’ve got a good handle on your emergency savings, credit situation, and other near-term financial needs, consider maximizing the impact of your tax refund over the long haul by investing it. And with prices rising for many consumer goods, experts say careful investing can be a good way to hedge against inflation.

How to invest it: Consider this: by investing the average 2021 Federal tax refund amount of $2,800 and any dividends, and assuming an annual return of 7%, after 10 years you’d nearly double your money. The longer your time horizon, the more you could see your money grow. Of course, investing comes with a measure of risk, and the market is constantly moving so it’s important you research the track record of the securities or other investment instruments you put your money into.

So how will you spend, save or invest this year’s tax refund? Choose one of these smart money moves and make a big impact on your financial future.

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