How to Make the Most of Your Tax Refund (Before You Screw It All)

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Receiving a tax refund can feel like receiving a windfall of money . But before you start spending, consider using your cash back wisely to improve your finances. According to a recent Bankrate study , about 30% of taxpayers plan to put their refunds into savings, and another third intend to use them to pay off debt. Both of these are smart steps that can lead you to long-term financial success, but how should you prioritize your various short-term and long-term financial goals? I spoke with Michael Hershfield, founder and CEO of built-in wallet Accrue Savings, to better understand how taxpayers can make the most of their refunds this year.

Taxpayer mistakes when refunding funds

“One of the common mistakes taxpayers make when making refunds is impulsively spending money on unnecessary expenses as soon as the money arrives,” Hershfield says. “It can be easy to view tax refunds as extra money, which causes many to forget the importance of strategic financial planning.”

To get the most out of your tax refund, approach it with a clear goal. Evaluate your financial situation and goals and make purchases that align with your long-term goals. Whether it’s saving, investing, or paying off debt, prioritize smart decision making while keeping your long-term financial goals in mind.

Use your tax refund to achieve long-term financial goals

Create a plan

Start by creating a comprehensive financial return plan tailored to your individual goals and values. A good way to do this is to create a daily, weekly and monthly budget. Hershfield recommends following the 50/20/30 rule to help you manage your finances effectively. Here’s what it looks like in general terms:

  • 50% of your monthly expenses go towards essentials. Your home, your transportation, your food, etc.

  • 20% of your monthly expenses go toward savings. You can also group debt payments into this category because paying off debt will help you build savings later.

  • 30% of your monthly expenses goes towards everything else. This could include gym memberships, travel, gifts and restaurant visits.

Unfortunately, there is no single magic table. Finding the one that makes sense for your personal situation may require some trial and error. Here’s our guide to budgeting, and be sure to check out some of the best budgeting apps based on your savings goals .

Pay off high interest debt

If one of your goals is to pay off high-interest debt , prioritize tax refunds on debts with the highest interest rates and fees first. This approach will lead to significant long-term debt reduction and financial freedom.

Prioritize your savings

Once you’ve used your money to pay off your debt, move on 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 purpose.

Tips for Smart Savings and Budgeting

Once you have your tax refund plan in place, be sure to maintain certain savings and spending habits throughout the year.

Avoid lifestyle creep

Avoid the urge to increase your spending when you receive your tax refund. Instead, focus on using your money wisely to improve your financial situation and achieve your long-term goals.

Control your expenses

Apps like YNAB and Goodbudget (RIP Mint!) can help you create a budget, track your spending, and set money-saving goals. The visualizations and notifications they provide will keep you focused and motivated. Again, I recommend checking out the best budgeting apps depending on whether you’re a saver or a spender . Choose one that will allow you to more easily see exactly where your money is going and identify areas where you can cut costs.

Set a spending limit and stick to it

There are plenty of budgeting worksheets and resources online, not to mention apps that can help you organize your tax refund distribution. Here are some great accounting tools to try:

Of course, you should allow yourself to spend some of the money improving your life and bringing joy. Simply set a reasonable budget for non-essential expenses to improve your quality of life.

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