3 Ways to Make the Most of Your Tax Refund, According to an Expert

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Here’s how you can put that money to good use.


Key points

  • A new survey reveals that half of Americans expect a tax refund this year.
  • A financial expert shares tips on how to maximize that money.

A tax refund is technically not the wonderful thing we tend to believe. When you get a refund, it means you paid more taxes up front than necessary and received less income as you earned them.

But despite this reality, most people who find out they’re getting a refund do a little celebratory dance rather than lament that they gave the government an interest-free loan. And if you’re expecting a refund this year, you’re in good company. A recent Ally Bank survey found that 50% of consumers expect a refund when they file their 2021 taxes.

If you have a refund coming up, it’s important to put that money to good use. Lindsey Bell, Chief Markets & Money Strategist at Ally Bank, is here to help you navigate your options. Here’s what she suggests doing with that pile of cash.

1. Pay off high-interest debt

If you have a mortgage, you don’t necessarily have to rush to pay it off early. But if you have high-interest debt, like a credit card balance, you’ll want to do your best to fix it as soon as possible. And your tax refund could help you reduce that debt or eliminate it entirely.

As Bell explains, “Balances on these types of accounts add up quickly and technically make the items you buy even more expensive. Devoting a portion of your refund to this can reduce your costly interest payments and help improve your credit score.” The higher your credit score, the easier and more affordable it becomes to borrow money the next time you need it.

2. Save some

“You never know when an unexpected expense is going to crop up,” says Bell. “Saving helps you prepare for whatever life throws at you.”

Generally, it’s a good idea to have enough money in savings to cover three to six months of essential expenses. Banking your refund could bring you closer to that goal.

Bell says now is a great time to increase an emergency fund. “Given that inflation has been on the rise lately,” she explains, “it might also be time to increase your emergency account to account for the rising prices.”

3. Splurge for yourself or your longer term goals

It’s a good idea to use your tax refund to improve your financial situation. But that doesn’t mean you should neglect your own needs. In fact, Bell suggests using some of your refund to splurge on something that lifts your spirits, from a gym class to a special purchase.

Bell also suggests investing in “your future”. This could mean opening a brokerage account and buying stocks if that hasn’t been an option before due to a lack of funds. And, says Bell, “If you’re not already, start contributing to your retirement plan or increase the amount you contribute.”

A tax refund is not necessarily something you can count on every year. If you’re getting a big IRS payday this year, make sure you’re getting the most out of that money, no matter how big your refund is.

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