Federal tax returns aren’t due until April 15th. However, you can start making a plan for your 2025 tax refund today, even if you have yet to file your return.
You might be excited about getting some cash back; however, it’s easy to blow through the funds quickly if you don’t have a plan in place. Below, we’ll walk you through this process to help you make better choices once the money gets into your hands.
Pay Down Debts
If you have any outstanding debts, like if you’re carrying a credit card balance or you owe medical bills or student loans, it’s a good idea to use the tax refund to pay it down.
Minimizing (or eliminating) debt is often a top priority before any major spending. Unpaid debts often accrue interest, with the amount you owe continually increasing until you fully pay it off. Thus, your tax refund is an excellent source of cash that you can allocate to debt repayment.
Cover Large Purchases
If you’re not concerned about debt, consider any large purchases you plan to make this year, including:
- Buying a new car
- Making a down payment on a house
- Replacing an old appliance
- Renovating your home
- Paying college tuition
- Investing in a new laptop
Each of these purchases requires a hefty up-front sum of money, which could be a good use of your tax refund. If you decide to use some of the money on one of these large transactions, place the purchase amount in your savings account as soon as you receive it. Even if the purchase is months away, you will have peace of mind knowing you have the funds readily available.
Make an Investment
If you’re in a good place financially, tax returns can be used to invest in low-cost mutual funds or other less risky options. This can help put you ahead financially by knowing your money will be potentially growing throughout the year rather than dwindling.
However, investments don’t always have to be purely financial. You can invest in yourself by using some of the money to take a course or learn a new skill, both of which may be beneficial to your financial, mental, physical, and emotional health in the long run.
Build an Emergency Fund
One of the best things you can do with your refund is save it. Whether you deposit it in a rainy day fund or put it towards your IRA, both are great choices. If you don’t already have a savings account, it’s time to start now. If possible, choose one with the highest interest rate to help your money grow faster.
As a rule of thumb, emergency funds should have at least three to six months of your income in case of job or home-related losses. If you don’t already have this money set aside, consider using the tax refund to build up the balance.
