How To Make Your Tax Refund Stretch Throughout the Entire Year (And Beyond)
Written by
Kerra Bolton
Edited by
Zuri Anderson
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Receiving a tax refund is one of the most anticipated events of the financial year. It is an opportunity to strengthen one’s financial future.
Instead of spending it all at once, here is how to make your tax refund stretch throughout the entire year and beyond.
Address Immediate Needs
Many people use their tax refunds to pay down debt or rebuild savings, but with the right strategies, they can last throughout the year — or even longer.
“By addressing immediate needs such as paying off high-interest debt, cover overdue bills or replenish depleted savings,” said Moira Corcoran, a certified public accountant (CPA) and Just Answer Tax Expert. “Paying off high-interest debt like credit cards saves you interest and frees up cash flow for other expenses.”
Janelle Sallenave, the chief spending officer at Chime, said individuals should start paying off credit cards with rates over 16%.
“If you prefer a smaller and more manageable start, try the debt snowball method,” Sallenave said. “By doing this, you’ll pay off your smallest debt first, then move your way up, directing extra money toward each balance as you go.”
Invest Your Refund
Whether individuals use their tax refund to contribute to an employer-sponsored 401(k) or individual retirement account (IRA), adding money to these accounts early allows taxpayers to benefit from compound interest.
“If you aren’t already contributing or maxing-out, adding to your retirement fund now can help you secure your financial future and boost your overall savings,” Sallenave said.
A high-yield savings account can help individuals invest their tax refund without risking loss.
“These accounts are federally insured (usually up to $250,000) and typically have a higher interest rate than a standard savings account,” said Leslie H. Tanye, Esq., a finance and debt expert and founder of Tanye Law Group. “I recommend shopping for a high-yield savings account with an annual percentage yield (APY) of at least 5%.”
Individuals could also invest in a treasury, which entails loaning money to the government with the promise of being repaid with interest.
“These investments vary in maturity, with treasury bills typically maturing one year (but can be sooner), and treasury bonds maturing after 20 to 30 years,” Tanye said.
Upskill
According to the Associated Press, professional and business services companies scaled back their job postings in recent months. A tax refund can also be a valuable tool for investing in your professional growth.
“Use it to take a course to learn a new skill or even earn a certificate in a select field,” Sallenave said. “Whether it’s preparing for a promotion or transitioning to a new career, these investments can lead to a higher salary in the future, making your refund even more valuable over time.”
Start An Emergency Fund
Use the tax refund to start an emergency fund.
“Then set up an automatic transfer to add funds to this account until the balance represents three to six months’ of living experiences,” said Pam Ladd, a certified public accountant (CPA) and senior manager of personal financial planning) at the American Institute of CPAs (AICPA).
Avoid ‘Early Refund’ Offers
According to the IRS, the average tax refund is $3,050, which could make a huge difference for financially vulnerable households, said Nick Maynard, senior vice president at Commonwealth.
“It’s hard to overstate how big a financial event this is for many low-to-moderate income households,” Maynard said. “At the household level, the federal tax refund is often the largest lump sum of many families receive all year, amounting to as much as 20% of annual household income.”
Maynard said that while a tax refund could be a financial windfall for some households, one way to stretch the money throughout the year is to avoid “early refund” offers, which often come with a fee.
“Typically, the IRS issues a refund within three weeks of electronic filing,” Maynard said. “Having a plan in place before receiving a fund can help you assign these dollars to good use.”
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