7 Best Ways To Save Your Tax Refund

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best way to save your tax refund

Looking for the best ways to save your tax refunds? We have seven ideas that can help you build wealth with your tax refund.

The April 15th tax filing deadline may bring dread to taxpayers everywhere, but the storm cloud comes with a silver (or dollar-covered) lining.

In 2022, nearly 100 million taxpayers received a refund, with the average refund being $3,039. This sizable payday could be the cash you need to set yourself up for financial stability and a growing net worth.

Here are the best ways to save your tax refund.

Decide How Much You’ll Save

Your tax refund may feel like “free money”, but it’s not. You earned that money through hard work throughout the year, but it’s tough not to treat it like extra money. 

Figure out how much of your tax return you’ll save and how much you’ll spend. Perhaps you want to save 90% of the refund and spend the remaining 10%. You may decide to spend half and save half. Whatever you decide, commit to saving the money before you start spending.

Once you decide how much to save, you need to decide how to save it. In general, saving your tax refund involves moving your money out of your checking account and into a different account. Our list can help you decide the best ways to save your refund.

Build A Buffer In Your Checking Account

If you frequently pay overdraft fees, then a buffer in your checking account could save you a lot of money, and stress.

Generally, a checking account is a terrible place to save money. It’s tempting to overspend when you have too much money in the account, and you can expect to earn a low rate of return on your cash. However, a small financial buffer in your checking account can give you tremendous peace of mind. 

When you have a buffer, you can put your bills on autopay and avoid all kinds of late and overdraft fees. Budgeting becomes much easier when you don’t have to worry about perfectly aligning payments with paychecks. If you regularly run your checking account close to $0 consider using your tax refund to build a small buffer into your checking account. Otherwise, skip this recommendation and consider one of the other options.

Boost Your Emergency Savings

Most financial experts recommend prioritizing emergency savings over all other financial goals. Saving three to six months of bare-bones expenses can help you weather major financial storms including job loss or other setbacks.

If you don’t have an emergency fund, open up a new high-yield savings account at a bank that doesn’t have your primary checking account. Separating your checking and emergency savings will ensure that you don’t accidentally spend your emergency savings on an emergency trip to Jamaica. Right now, the best savings accounts offer interest yields of over 5% per year, so saving money is quite rewarding.

Check out our list of the best high-yield savings accounts

Pay Off High-Interest Debt

Once you have a buffer in your checking account and emergency savings, it’s time to tackle your high-interest debt. The Federal Reserve Economic Data (FRED) showed that the average interest rate on credit cards was over 22% as of November 2023. Paying off credit card debt guarantees a massive return on your investment.

Not sure which debt to pay first? We give step-by-step guidance on which debt to tackle first.

Invest in a Roth IRA

With an emergency fund in place and high-interest debt eliminated, you can move on to growing your wealth.

Investing involves putting your money at risk with the expectation that your money will grow over the long haul. The first place to start investing is a Roth IRA. You can open a Roth account at most major brokerage companies. A Roth IRA is a retirement investment account. For 2024, you can contribute up to $7,000.

A Roth IRA is a tax-advantaged investment account. You’ve already paid taxes on the money you contribute to the account. Money that you keep in the account grows tax-free, and you won’t have to pay taxes when you take money from the account during retirement.

If you contribute $3,000 today, and earn 8% annually, your investment will grow to over $30,000 in 30 years. If you contribute $3,000 per year, you can expect to see over $370,000 in 30 years.

Remember, the value of investments can fluctuate, and it’s normal to see investment values fall and rise. If you’re investing for retirement, the best thing you can do is invest your money and leave it alone.

Related: Best Places To Open A Roth IRA

Save For Your Child’s Education

Parents may want to consider investing in a 529 Plan for their children. A 529 Plan is an investment account where growth isn’t taxed as long as the money is used for educational expenses. Some states even offer tax credits or deductions for parents who use these accounts.

Even though saving for your retirement is more important than paying for a child’s education, this type of saving can be rewarding. When you save for educational expenses, your child can limit the burden of student loan debt. That knowledge can be motivating for parents, especially if you remember how hard you had to work to pay off your own debt.

Start Investing In Real Estate

When your retirement savings are on track, investing becomes even more fun. With a few thousand dollars, you can start investing in real estate. You won’t be able to buy a house with your tax return, but you can invest through real estate crowdfunding.

You could also save the money and add to it over time. With a large enough stash of cash, you will have the money for a down payment on a house. You could then rent out the house, live in it, or do both. House hacking involves living in a part of the house and renting out the rest of it. It’s one of the best ways to safely enter the world of real estate investing.

Consider Alternatives

Alternative investments are any investments that you can’t buy, sell, or trade through traditional financial markets. Real Estate is one type of alternative investment, but alternatives also include crypto, fine art, land, precious metals, and more. You don’t have to invest in alternatives, but many investors like to learn about the investments in this asset class and invest a portion of their portfolio in alternatives.

Many alternative investments are very speculative. These investments could take years to pay out, or they could go to zero. We only recommend investing in alternatives when you’re meeting your financial goals and have money left over for riskier investments.

Final Thoughts

While this list suggests an order of operations to save your money, you don’t have to follow these recommendations. Saving and investing money will help you grow your net worth over time. Your tax refund may be your biggest source of “extra” income this year. Anything you can do to save the money will help you grow your net worth over time.

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