The IRS says that the average tax refund in 2024 will be about $3,000.
When extra money comes along it can be easy to just fold it into our normal spending and then wonder where it went. But it can also be a great opportunity to get a jump start on a financial goal – something that could pay off for years to come.
If you are getting (or have already gotten) a tax refund, and don’t want to end up six months from now wondering what you even spent it on, here are seven ways to make that money really work for you.
1. Build your emergency fund
If the idea of missing a month’s worth of income puts you in a panic – you need an emergency fund! Medical emergencies, family emergencies, job loss – they can and do happen. Having one month’s worth of expenses in savings will help keep the unexpected from becoming a financial disaster. Once you have that in place, start working towards having three to six months of expenses in savings. Why that much? That is the average time that it takes someone to find a new job.
2. Pay off credit card debt
Credit card debt is just about the most expensive debt you can have. Using your tax refund to take a chunk out of your credit card debt can lower your monthly payments and make it easier to pay off the rest.
If, for example, you use a $3000 tax refund to pay off a credit card with 29% interest, you will save $870 in interest for each year that you would have kept that balance. It will also free up about $70 in minimum payments that you can use to either pay off another card or put in savings.
3. Put it into your 401(K) or Roth IRA
Your $3K could turn into $30,000 or more for retirement. How is this possible? If you are 35 and get an 8% return rate, that $3K will grow to $30,188 by the time you retire at age 65. If you are 45 you would have the $30K at age 75, when you will probably still need it!
But wait, there’s more! If you are putting it into your 401(k) and your employer matches your contribution at 50% (the most common option), that $3K could become $45,282. And since the contribution is pre-tax, if your tax rate is (for example) 22%, you can actually contribute $3,660 and your paycheck will only go down by $3,000.
Remember, if you are already contributing the maximum to your 401(K) and Roth IRA, you can always still invest it in a non-retirement account.
4. Invest in increasing your income
Increasing your income, either by getting a higher-paying job, getting a promotion, or creating a profitable side business, can change your financial picture in a dramatic way.
Is there a certificate or training you could take to get a higher paying position at your current workplace? Could time spent with a career counselor, an interview coach, a resume writer, or at networking events, help you land a better job? Could your tax refund be a starter fund for a new, money-making side business?
You may have to step out of your comfort zone, but a change like this can open up many new options for your life and your finances.
5. Invest in your physical, mental, or emotional health
Without these things, it’s hard to make the rest of it work. Spending a little bit of money to improve your physical, mental, and/or emotional health can help improve all areas of your life.
- Online sites like BetterHelp.com (which I personally have used) can make therapy affordable and accessible.
- Life coaching can help you set goals, work on change, and see problems from a new perspective.
- Try a new exercise class, join a sports league, take a dance class, yoga class, meditation class, or try personal training.
- If you have an ongoing physical problem, maybe this is an opportunity to spend some money on physical therapy, massage, acupuncture, a chiropractor, a nutritionist, or some other form of help.
- Invest in your dental health, whether that is a state-of-the-art toothbrush and flosser, or scheduling an overdue procedure or check-up.
- Check into what resources your workplace offers. They might offer discounted (or even free) gym memberships, classes, or counseling.
6. Invest in financial coaching
Yes, I’m talking about me! Financial coaching is a small investment of your time and money that can pay off huge rewards.
Most of us have never had an outside person look at our finances. We tend to just do things the same way we’ve always done them, even if it is not working. As your financial coach, I will help you clearly see your current financial situation. I can spot things you may not have thought of, help you think through what you want your financial future to be, and offer strategies to get there.
I offer a 4-session coaching package is just $280. During these four sessions we will take a close look your finances, we will talk about personal finance topics, and we will come up with solutions that work for you to get you to your goals.
Learn more by scheduling a free, no-obligation, 30-minute initial video call with me.
7. Save it in a high-yield savings account
The fact that you can currently get as much as 5% interest in a savings account right now is pretty crazy. Who knows how long these rates will last, but for right now it is a great, safe option for building up a nest egg for whatever you might want to do in the future. Make sure to look for an account with no fees that is FDIC insured.
Have questions about how exactly to implement some of these ideas? Have other ideas about how to use your tax refund? Let me know, I’d love to hear your questions or thoughts!
