2 Things You'll Regret Doing With Your Tax Refund -- and 3 You Won't

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KEY POINTS

  • Spending your tax refund doesn’t always give you long-term benefits.
  • Applying it to debt or looking for a higher yield over time can be more rewarding.


Don't touch your refund without thinking it through.

The average refund this tax season so far is about $3,175. That kind of cash could go a long way toward paying bills or financing a big-ticket purchase. But before you touch your refund check, think through all your options. Some decisions might sound smart right now, but they may not do you any favors over the long term. Here are two decisions to avoid, as well as three to consider.

Two things you'll regret doing with your tax refund

If your goal is to squeeze the most value out of your tax refund, you should probably avoid these things:

1. Spending your tax refund on things you don't need

Discretionary purchases can be fun, and you can buy a lot with the average tax refund -- but you'll never do better than the face value on your refund check. You lose the opportunity to grow that refund into a larger sum you could spend on even more things.

That isn't to say you should never spend your tax refund. If you have a major home or auto repair to make, using your refund check to cover these costs can make sense. But if you don't truly need an item, spending your entire tax refund on it may not be the best choice.

2. Keeping it in a brick-and-mortar savings account

A savings account can be a great place to house your tax refund if you don't need the money right away, but it will earn next to nothing at a brick-and-mortar bank. Most brick-and-mortar banks have annual percentage yields (APYs) at or under the national average of 0.06% APY.

If you kept the average $3,175 refund in a savings account with a 0.06% APY for 10 years, you'd only end up with about $3,194. That's a $19 profit.

A high-yield savings account is a better choice for most people. These accounts are usually offered through online banks, and the best have APYs of around 0.50% right now. Over 10 years, a $3,175 tax refund invested in one of these accounts would grow to $3,337 with a 0.50% APY. And that's a profit of $162.

Three things you won't regret doing with your tax refund

These three things can help you get the greatest value out of your tax refund.

1. Invest it

Investing is the best solution if you don't need your tax refund to cover expenses or debt in the near future. The stock market can be volatile in the short term, but over the long term, it's been one of the best ways to grow your money.

You're likely to earn significantly more by investing than by stashing the money in a high-yield savings account. Continuing our example from above, if you invested the average $3,175 and it earned a 7% average annual rate of return, you'd have $6,246 after 10 years. That's almost double your initial investment.

2. Use it to pay off high-interest debt

Those with payday loan or credit card debt would do well to put their tax refunds toward debt repayment. If you have debt on multiple credit cards, put it toward the card with the highest interest rate first. If you pay that off completely, move to the card with the next-highest interest rate, and so on.

This can help you get out of debt faster than just making the minimum payment, or spreading your refund evenly among several cards.

3. Beef up your emergency fund

With inflation driving up the cost of everything, now's a great time to rethink your emergency fund. Ideally, you should keep at least three months of living expenses in it, and some people prefer to save six months of expenses or more.

Calculate how much you spend per month right now, then decide how many months of savings you want on-hand. If your emergency fund falls a little short of that goal, consider adding some or all of your refund check to get it to where you want it.

This isn't an exhaustive list of everything you can do with your tax refund, but may get you thinking about options other than spending your money. There's nothing wrong with spending it if you don't have high-interest debt and have a robust emergency fund. But to get the most out of your refund check, consider other options.

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