Getting a tax refund can feel like receiving a nice windfall of cash. But before you go on a spending spree, consider using your refund money wisely to give your finances a boost. According to a recent study by Bankrate, around 30% of taxpayers plan to deposit their refunds into savings, while another third intend to use it to pay off debts. Both of those are smart moves that can set you up for long-term financial success—but how should you prioritize your different short- and long-term financial goals? I spoke with Michael Hershfield, founder & CEO of embedded wallet Accrue Savings, to better understand how taxpayers can make the most of their refunds this year.
Mistakes taxpayers make with their refunds
“One common mistake taxpayers make with their refunds is impulsively splurging on unnecessary expenses as soon as the money arrives,” Hershfield says. “It can be easy to view a tax refund as extra money, which leads many to forget the importance of strategic financial planning.”
To ensure you make the most out of your tax refund, approach it with a clear purpose in mind. Evaluate your financial situation and goals, and make purchases that align with your long-term objectives. Whether it’s saving, investing, or paying off debt, prioritize thoughtful decision-making by keeping your long-term financial goals in mind.
Leverage tax refunds into long-term financial goals
Create a plan
Start by creating a comprehensive financial plan for your refund, tailored to your individual goals and values. A good way to do this is by creating a daily, weekly, and monthly budget. Hershfield recommends following the 50/20/30 rule to help you manage your finances effectively. Here’s how it breaks down, in broad strokes:
50% of your monthly spending goes toward essentials. Your home, your transportation, your food, etc.
20% of your monthly spending goes toward savings goals. You can also group debt payments into this category, since paying down debt helps you build savings later.
30% of your monthly spending goes toward everything else. That might include your gym membership, travel, gifts, and dining out.
Unfortunately, there’s no one magic spreadsheet out there. It may take some trial and error to find one that makes sense for your personal situation. Here’s our guide to getting your budget started, and be sure to check out some of the best budgeting apps based on your savings goals.
Pay down high-interest debt
If one of your goals is paying down high-interest debt, prioritize directing your tax refund toward the debts with the highest interest rates and fees first. This approach will lead to significant long-term debt reduction and financial freedom.
Prioritize savings
After directing money to paying down debt, turn to your savings goals. Whether it’s building an emergency fund, saving for a vacation, or planning for retirement, having specific goals will give your savings a purpose.
Smart saving and budgeting tips
After making a plan for this tax refund specifically, remember to abide by certain saving and spending habits year-round.
Avoid lifestyle creep
Avoid the urge to increase your spending when you receive your tax refund. Instead, focus on using the money wisely to improve your financial situation and achieve your long-term goals.
Monitor your spending
Apps like YNAB and Goodbudget (RIP Mint!) can help you create a budget, track your spending, and set money saving goals. The visualization and notifications they provide can keep you focused and motivated. Again, I recommend checking out the best budgeting apps based on what kind of saver or spender you are. Choose the one that makes it easiest for you to see exactly where your money is going, so you can identify areas where you can cut back.
Set a spending limit and stick to it
There are plenty of budgeting spreadsheets and resources online, not to mention apps, that can help you organize where you allocate your tax refund. Here are some great accounting tools to try:
Quicken Simplifi ($2 per month)
RocketMoney ($3 per month)
Intuit QuickBooks Online ($15 per month)
Of course, you should allow yourself to spend some of the money enhancing your life and bringing joy. Just set a reasonable budget for non-essential, quality-of-life spending.
