Getting a tax refund? Here’s how to spend it wisely 

Key takeaways 

• It may be tempting to use your tax refund to splurge on something fun. 
• Using your refund to help you realize your financial goals may be wiser, though. 
• Receiving a refund may also be a good reminder to reconsider how much you’re withholding throughout the year. 

If you’re one of the millions of Americans expecting a refund from the IRS for your 2023 taxes, you may also be counting all the things you want to spend it on. But before you run out and splurge, you may want to consider using your refund to help achieve your personal finance goals instead. Read on for some tips on how to do just that. 

Using a refund to pay off debt 

You probably know that one of the best things you can do to get your financial house in order is to pay down any outstanding debt. Your refund can go a long way toward helping you take that step. And you wouldn’t be alone – a February survey from Bankrate found that 19% of respondents plan to use their refund to pay off debt, including what they’ve racked up on credit cards.  

If you need some pointers on how to get started tackling what you owe, check out our earlier article on the topic. Reducing or erasing your debt also means avoiding paying more in interest, so it’s often the smartest first step you can take toward a more financially secure life. 

Save for retirement 

Whether or not you’re completely debt-free, having a little cushion of savings is also a great way to boost your financial health. If you expect a refund, you may consider socking some of the money away for your retirement. If you have access to an employer-sponsored pre-tax plan, you could boost your contribution to it.  

You also have the option of opening your own individual retirement account (IRA). There are two types of IRAs. With Roth IRAs, you contribute money after taxes, but your withdrawals are tax-free. Traditional IRAs allow you to contribute either pre-tax or after-tax dollars, and your fund grows tax deferred. 

Another, related option is opening or funding a health savings account, or HSA. These tax-advantaged savings accounts, which are generally only available if you have a high-deductible insurance plan, are a tax-deferred way to help you pay out-of-pocket medical expenses.  

Give yourself an emergency fund  

Another option for your refund may check two boxes. With interest rates remaining high, you may want to open a money market account or buy a certificate of deposit (CD) to start (or to boost) an emergency fund. It’s a great idea to aim for a fund that could cover at least six-to-nine months’ worth of living expenses — but you may want to try to sock away even more.  

You don’t have to come up with all that money at once, however.  Starting a fund with the goal of adding to it over time can bring you enormous peace of mind. It’s important to remember that unexpected expenses are part of life. If you don’t have a cash cushion for when they do pop up, you might be forced into debt to pay for them. 

One tip: if you like the idea of applying your tax refund to a savings account but worry that having that cash on hand might be too tempting, you can always have the IRS and your state tax office direct deposit your refund to a special account you set up just for savings. 

Get your financial house in order with home improvements  

You probably know that home maintenance projects and upgrades are money well spent. If you’re like most people, your home is your biggest asset. When you make improvements, you get a refreshed, updated space in which to live, but you might also boost the value of the asset, and you probably avoid having more costly repair bills down the road. 

There are dozens of ways to upgrade your home. If you’re overwhelmed by all the options, you may want to prioritize the ones that help with energy efficiency, since they’ll also help you save on utility costs. Check out some energy-efficiency ideas, including energy-efficient appliances, heat pumps, and whole-house fans. 

In the same vein, a smart thing to do with your refund that may also feel like an indulgence is to apply it to the purchase of a new, more energy-efficient car. Some available tax incentives can help; check out the IRS summary of current incentives for electric vehicles. 

Final thoughts  

It’s worth noting that if you did receive a large refund, you may want to rethink your tax strategy. It’s nice to get back a chunk of change in the spring, of course, but it may also be a sign that you’ve been turning over too much of your paychecks to the government throughout the year.  

The IRS has a handy Withholding Calculator that you can use to figure out an optimal amount of federal income tax withholdings.  

And if you want to use tax time as a nudge for getting your finances together, but your refund is just too small to make a real difference, consider obtaining a home equity agreement (HEA) from a provider like Unlock. An HEA allows you to sell a portion of the future equity in your home to a provider like Unlock in exchange for cash now to pay down debt, fund home improvements or achieve other financial goals.  

HEAs are not loans, instead, you pay off Unlock’s equity share in your home when you sell your property or at any time during the HEA’s ten-year term. There are no monthly payments, interest rates or high credit score requirements. The income requirements for HEAs are also more flexible than with loans.  

For more information, visit Unlock Technologies and get started today.