3 Great Things to Do With Your Tax Refund

In 2023, the average tax refund was $2,903 according to The Motley Fool Ascent's tax research. Whether you get back more or less than that amount, chances are good your refund will be one of the largest lump sums of money you receive during the year (outside of perhaps the paychecks you probably use to cover your routine expenses).

Getting a big lump sum of money deposited into your bank account gives you a chance to do something important to get you closer to accomplishing your financial goals. In fact, here are three great things you may want to do if your tax software shows a refund is coming your way.

1. Pay off debt

If you have credit card or other high-interest debt, paying it off could be a great move. You could make real progress on reducing your balance if you get a large tax refund, or could perhaps even pay off the balance entirely. Since the average credit card interest rate is 21.47%, reducing your balance could provide huge savings.

Say, for example, you owe $3,000 at 21.47% and you were making payments of $200 a month toward what you owe in an effort to repay your balance. You'd have 18 more payments and would pay a total of $510.67 in interest. But if you got the average tax refund of $2,903, you could reduce your balance down to less than $100 and pay it off with your next payment, saving yourself hundreds in interest.

2. Bulk up your emergency fund

If you don't already have three to six months of living expenses saved, you could use your tax refund to bulk up your emergency fund. Surprise costs can happen to anyone at any time, and if you are unprepared, you could find yourself going into debt to cover them.

If you can deposit a tax refund of $2,903 (or whatever amount you get) into a savings account for emergencies, this could give you enough to at least cover some unexpected expenses. You'll have more peace of mind and will be less likely to get stuck reaching for the credit cards when things go wrong.

3. Invest for your future

Investing in a brokerage account is another great option, especially if you already have an emergency fund and don't have high-interest debt.

If you invest a tax refund of $2,903 and earn a 10% average annual return on that money over a decade, you'd end up with $7,529.63. If you invest a $2,903 refund every year for that full decade, you'd have $58,422.61. That's a good amount of money, and you're likely going to be a lot happier to have so much cash than you would be if you'd just spent your refund.

The right one of these options will depend on where you are in your financial journey. High-interest debt should usually take priority, followed by emergency savings, and then investing. But it's up to you to decide which option is best for you and which you're most excited about. The important thing is to make the most of the opportunity that getting a big refund presents and use the money to improve your personal finances over the long haul.