Tax Day Countdown: 4 Ways To Get Richer by Investing Your Tax Return Wisely
Written by
Emily Fowler
Edited by
Jenna Klaverweiden
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A tax refund can be a stepping stone to greater financial stability, whether you are funding a retirement account, paying off credit card debt or chipping away at your student loans. Even if the refund is a few hundred dollars or a larger windfall, investing it strategically can lead to long-term benefits. Filing for the 2024 tax year has a deadline just around the corner so it is now time to figure out what you want to do with your refund check.
GOBankingRates spoke to Chad Faulkenberry, CFP, managing director of Journey Strategic Wealth, for advice on how to make the most of your refund after filing your return, no matter the size.
Focus On Emergency Savings
According to Faulkenberry, small federal tax refunds — under $500 — are best used to start bolstering financial security. He stressed the importance of building an emergency fund before diving into investments.
“The first step is to ensure you have an emergency fund in place — ideally three to six months’ worth of living expenses — before you begin investing,” he said. “This provides a financial safety net, giving the security to invest for the long term and grow wealth.”
For those without any savings, a refund as small as $500 can cover immediate essentials like a car repair or medical copay, offering a critical buffer against financial shocks. Even partial progress toward the ideal three to six months’ worth of funds lays the groundwork for greater financial confidence.
Balance Your Debt Before Investing
When refunds are larger — several thousand dollars — Faulkenberry advised prioritizing high-interest debt repayment before investing. “The balance between paying down debt and investing depends on the type of debt you have,” he said.
High-interest consumer debt should be cleared first. For example, the Federal Reserve reports that the average credit card interest rate in the U.S. is over 20%, making it one of the costliest types of debt to carry.
After eliminating high-interest debt, Faulkenberry encouraged focusing on savings strategies. For those with access to employer-sponsored 401(k) plans, taking full advantage of matching contributions is a smart move. The remaining funds can then be directed toward either additional investing such as in a retirement savings like a Roth IRA or traditional IRA or accelerating lower-interest debt repayment.
Start Small With Low-Risk Investments
For those new to investing, Faulkenberry acknowledged that the process can feel overwhelming, but it doesn’t have to be, and there are options for both short-term stability and long-term growth — both of which can have tax advantages.
“Low-risk options like high-yield savings accounts, [certificates of deposit] and money market funds protect your principal but may not keep pace with inflation,” he said. These are best for short-term goals, such as building an emergency fund.
For those looking to grow wealth over time, he recommended exchange-traded funds that track broad indexes, like the S&P 500. “This offers greater potential for returns over time, along with diversification compared to buying individual stocks,” he said.
A strong financial foundation, including an emergency fund, is key to weathering market downturns and staying invested for the long haul.
Invest In Growth Opportunities
According to Faulkenberry, refunds can also be used to create new income streams. Starting a side business or investing in skill-building opportunities are practical ways to transform a one-time refund into lasting financial growth.
“Refunds can fund certifications, courses or tools needed to boost earning potential or launch a small business,” he said. These investments often lead to compounding benefits, providing both immediate and long-term returns.
Final Take To GO: Strategic Planning Is Key
The bottom line is that no matter your type of income, the size of a refund doesn’t determine its impact. Strategic planning — whether for saving, investing or paying off debt — is the key to maximizing financial benefits, and even make them tax-deductible.
One of most frequent mistakes people make with tax refunds is failing to plan. This often leads to impulsive spending that doesn’t align with financial goals.
“The most common mistake people make when receiving a lump sum of money — whether it’s a tax refund, bonus or inheritance — is not having a plan for how to use it,” Faulkenberry said. “Having a clear plan acts as a roadmap to achieving financial freedom.”
A thoughtful allocation of funds allows for balance. While enjoying some of the money is fine, securing a financial future should take priority.
“With the right strategy, a refund becomes more than extra cash — it’s a stepping stone to a brighter financial future,” Faulkenberry said.
Caitlyn Moorhead contributed to the reporting for this article.
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