3 Ways to Make the Most of Your Tax Refund, According to an Expert
Here's how you can put that money to good use.
- A new survey reveals that half of Americans are anticipating a tax refund this year.
- A financial expert shares tips on how to maximize that money.
A tax refund is technically not the wonderful thing we tend to think it is. When you get a refund, it means you paid more taxes upfront than you needed to and collected less of your income as you earned it.
But despite that reality, most people who find out they're getting a refund do a little celebration dance rather than bemoan having given the government an interest-free loan. And if you're expecting a refund this year, you're in good company. A recent Ally Bank survey found that 50% of consumers are expecting money back when they file their 2021 taxes.
If you have a refund coming your way, it's important to put that money to good use. Here to help you navigate your options is Lindsey Bell, Chief Markets & Money Strategist at Ally Bank. Here's what she suggests doing with that pile of cash.
1. Pay down high-interest debt
If you have a mortgage, you don't necessarily have to rush to pay it off ahead of schedule. But if you have high-interest debt, like a credit card balance, you'll want to do your best to tackle it as soon as possible. And your tax refund could help you whittle that debt down or knock it out altogether.
As Bell explains, "Balances on these types of accounts accumulate fast and technically make the items you purchase even more expensive. Putting a portion of your refund toward this can reduce your costly interest payments and help improve your credit score." The higher your credit score, the easier and more affordable it becomes to borrow money the next time you need to.
2. Save some of it
"You never know when an unexpected expense is going to pop up," Bell says. "Saving helps prepare you for whatever life throws at you."
As a general rule, it's a good idea to have enough money in savings to cover three to six months of essential expenses. Putting your refund into the bank could get you closer to hitting that goal.
Bell advises that now's an especially good time to boost an emergency fund. "Since inflation is running hot lately," she explains, "it might also be time to boost your emergency account to take higher prices into consideration."
3. Splurge a little on you or your longer-term goals
It's a good idea to use your tax refund to improve your financial picture. But that doesn't mean you have to neglect your own needs. In fact, Bell suggests using some of your refund to splurge on something that lifts your spirits, from a gym class to a special purchase.
Bell also suggests investing in "future you." That could mean opening a brokerage account and buying stocks if doing so has previously not been an option due to a lack of funds. And, Bell says, "If you aren’t already, start contributing to your retirement plan or increase the amount you are contributing."
A tax refund isn't necessarily something you can count on every year. If you're getting a big IRS payday this year, be sure to make the most of that money, no matter how large or small your refund is.
Alert: highest cash back card we've seen now has 0% intro APR until 2024
If you're using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.