The No. 1 Best Way To Spend Your Tax Refund, According to Budgeting Experts
Written by
Cindy Lamothe
Edited by
Rebekah Evans
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Tax season is here and if you’re lucky enough to receive a refund, you’re probably thinking about how to make the most of it.
Whether it’s a little extra cash or a nice chunk of change, the way you choose to spend or save it can have a big impact on your financial future.
“I’ve been a budgeting expert for over a decade and let me tell you — most people get this completely wrong,” said Andrew Lokenauth, money expert and owner of BeFluentInFinance. “They see that refund hit their account and immediately start dreaming about new TVs or fancy vacations.”
So, what’s the best way to use that refund? Here’s the No. 1 way to put your tax refund to work: Split that refund into a 50/25/25 formula.
Do This With the First 50%
Lokenauth has seen this approach work miracles with his clients’ finances.
He explained the first 50% should go straight toward paying down your highest-interest debt.
At the present moment, The Guardian reported that U.S. credit card debt reached a record $1.17tn in the third quarter of 2024. That’s a lot of money right there.
By targeting high-interest debt first — especially credit card balances or payday loans — you can significantly reduce the amount of money you’ll pay in interest over time. This strategy doesn’t just lighten your debt load; it saves you money in the long run.
“Just last month, I worked with a client who put $1,500 of her refund toward her credit card debt — saved her about $300 in interest over the next year,” he said.
Whether it’s a few hundred or a few thousand dollars, even small contributions can make a significant difference in reducing the total interest paid over time.
By staying focused on eliminating high-interest debt first, you’re giving yourself the best chance to become debt-free sooner and ultimately, to keep more of your hard-earned money for the things that really matter.
The Next 25% Needs To Go Into an Emergency Fund
“And trust me, I know how boring this sounds,” Lokenauth said. “But I can’t tell you how many times I’ve seen people thank me later.”
He noted that one of his clients lost his job in March and that the emergency fund portion of his tax refund kept his family afloat for two months while he job hunted.
While it might not have the same instant gratification as treating yourself to something fun like a vacation, an emergency fund is one of the most critical financial tools you can have.
It acts as a financial cushion that protects you from the unexpected — whether it’s a job loss, a medical emergency or any other unforeseen expense that could throw your stability through a wrench.
Do This With the Final 25%
This is where Lokenauth said he sometimes gets pushback: he advised investing the rest in your retirement accounts.
“I personally put this portion in my Roth IRA every year. The compound interest is just too powerful to ignore,” he said. “A $1,000 investment could turn into $7,000 to $10,000 over 20 years (depending on market performance).”
In other words, the earlier you start investing, the more you’ll benefit from the compounding effect, as your money begins earning interest on both your initial investment and the interest you’ve already earned.
The Roth IRA is particularly appealing because of its tax advantages: contributions are made with after-tax dollars, but the money grows tax-free and you can make tax-free withdrawals in retirement.
This makes it a great option for those who are looking to build wealth over the long term without worrying about taxes eating into their earnings later on.
Being Responsible Is Key
“Look, I get it,” Lokenauth said. “This isn’t the sexy answer most people want. They’d rather hear me say ‘buy that new iPhone’ or ‘book that beach vacation.’ But after working with thousands of clients, I’ve seen this 50/25/25 strategy create real, lasting financial stability.”
He said it’s the difference between temporary happiness and long-term wealth building.
According to Lokenauth, the thing is, financial freedom isn’t built on splurge purchases — it’s built on smart, consistent decisions like this.
“And while this might not be the most exciting way to use your refund, I promise it’s the one that’ll make future-you the happiest,” he added.
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