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Plan for a Tax Refund

(Make the Most of It)

If you are getting a tax refund this year, take some time to reflect on how you can get the most bang for your buck. You can even approach it like a game. What is the smartest play? Which action will add the most to your wealth and cost the least in fees and interest?


Paying down debt frees up more spending money and improves your credit. Let’s say you have a smallish credit card bill and you’re paying minimum amounts. You could keep paying $30 a month for a minimum payment for the next several years, or you could use your refund to eliminate the debt and put $30 more into your pocket each month. Not to mention the interest you won’t be paying anymore.

There’s nothing quite like the feeling of paying off a debt. It can get addicting. With each debt you pay off, you can add that to payments on your next largest debt, and before you know it, you can make real progress toward becoming debt-free.


Having an emergency fund gives you something priceless — peace of mind. The chances of needing emergency money are quite high. Whether you’re faced with a smaller setback like a fender-bender or a large expense like an unexpected medical bill, you’ll be less stressed knowing you have at least some money in the bank.

This is important because one in four 20-year-olds today will experience a disability before they retire. It’s often not for what you think. Chronic illnesses, including digestion problems, mental health issues and repetitive strain on joints and tendons coming from normal aging can cause missed work and lost income. Don’t wait for something bad to happen before starting your emergency savings. Research shows people with at least $400 in emergency money are less stressed overall. Consider using part or all of your tax refund to get closer to this goal.


If you’re more in the mood to splurge, that’s OK too. Maybe you decide to split your refund to use some of it for fun stuff and some of it for debt repayment and savings. Before you spend it all, consider the value of what you’re spending it on. Sure, you can buy clothes, gadgets or even experiences like a night out or a family vacation. But consider how these purchases will pay off (or not) over time. How might you use your refund to further a long-term goal instead? For example, what if you started a savings fund for a down payment on a house or to get a better car? What if you used it to pay for a class or other training to further your career or creative goals?


Looking ahead, you might decide you would rather not get a refund next year and keep that money in your take-home pay instead. When you get a refund, it actually means that you overpaid taxes. Even though it feels like you are getting money back from the government, a refund is your money that the IRS is giving back to you because you paid more taxes than necessary. Some people purposely claim 0 allowances on their W-4 forms with their employer with the aim of getting the largest tax refund possible.

Two young women enjoy talking about what to do with their tax refunds.

This is one way to save up money throughout the year. You could choose not to overpay taxes and instead have less taken out by increasing the allowances on your W-4. The higher the allowances, the less taxes come out. But this is a balancing act because you also don’t want to have too little tax withheld, which will result in you owing taxes.


You don’t have to spend your refund all in one place and you don’t have to spend it right away. Consider giving yourself a “cooling off” period. Deposit your refund in a savings account and let it sit for a while as you decide the best uses for it. Having a chunk of money doesn’t happen too often. Take time to weigh your options before making a move.

As always, we’ve got your back. — The On Your Own Team End of article insignia

[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by On Your Own, the National Endowment for Financial Education or any of its affiliate programs.]