4 Ideas for How to Use Your Tax Refund

Kelan Combe, Program Coordinator
​USU Extension Empowering Financial Wellness Program

Tax season is coming to a close on April 15th! While no one likes filling out all the boring forms to file your taxes, I know we all love it when we get a tax refund. The tendency of most people is to immediately go out and spend their tax return, but let us offer you some more productive ways to use your refund to improve your financial future.

1. Pay down debt. If you are working to pay off debt, the best thing you can do is make extra payments whenever possible. Let me share a real-world example:

• Kevin has a credit card with a balance of $5,000 and an interest rate of 22.75% (average national rate). If Kevin only made the minimum payment, which is usually around 2-3% of the total balance, and didn’t make any extra payments, it would take him 4.5 years to pay off this credit card.
  
• If he used his tax refund to make an extra payment of $1,000, it would only take him a little over 3 years to pay off the debt, and would save him $1,358 in interest. The higher the extra payment, the more time and money you save!
  

​If you want to learn more about effective ways to pay down debt, visit powerpay.org.

2. Start, or add to an emergency savings account. Having an emergency savings account is one of the most popular recommended strategies for financial wellness, and for good reason. According to Bankrate’s Annual Emergency Savings Report, more than half of all Americans say they couldn't pay for a $1,000 emergency expense from a savings account. 1 out of 5 people say they would use a credit card and pay it off over time, but what would it look like to use a credit card instead of savings? Well, using the same averages as our previous example, it would take 4.5 years to pay off, and you would end up paying almost $600 more just in interest. This turns a one-day emergency into a 4.5 year emergency! That is why most financial professionals consider it necessary to have emergency savings.

3. Invest in your future. We’ve already seen a few examples of how interest rates can work against you, but why not use your tax refund to make them work for you? By investing your refund in a retirement account like an IRA, your $1,000 today could be worth over 10 times that by the time you reach retirement age. You might also consider investing in your kid’s education using a 529 plan. Even a little bit invested right now could mean massive savings in the future.

4. Save for a fun goal. Maybe there is a vacation you have always wanted to take, or a car or other large purchase you have always wanted. Instead of using your whole tax refund now, consider saving some for a future goal. Using an online savings account could be a great way to boost that savings even further! NerdWallet is a great resource to compare online savings options. 

Remember that you are in control of your financial future. So when something big like a tax return comes your way, make sure your money is working for you and not the other way around.