Tax refunds started arriving this month. Whether your tax refund is $500 or $5,000, consider using a portion of it to grow your savings or pay down debt.
Build a Starter Emergency Fund
Start with enough savings to cover one month of basic expenses like rent, food and utilities. Keep this money in an account you can reach quickly but won’t accidentally spend.
Make your savings strategy easier and set up an automatic transfer. It can be difficult to get started, but saving $20 a pay period adds around $500 per year to your emergency fund.
A high‑yield savings account earns interest and helps your balance grow quickly. Allocating part or all of your refund gives you a solid foundation.
Create a Checking Account Buffer
Choose an amount to keep in your checking account as your “do not cross” line. This protects you from overdraft fees if a bill comes through before your paycheck.
Fees add up quickly and can push you to use credit cards to fill the gap. Treat this buffer as if it isn’t there when you check your balance. For added protection, consider linking your savings account as an overdraft backup to your checking account.
If your balance dips below your “do not cross” line, funds can automatically transfer to help you avoid costly fees and unnecessary debt. Check with your financial institution about how this feature works and any potential fees involved so you can use it as an extra safety net.
Save for Upcoming Expenses
After building an emergency fund, use it for unexpected expenses, like car repairs or medical bills. Saving more in manageable amounts prevents these costs from being overwhelming.
If you still have money left over after reaching your savings goals, you have a great opportunity to pay down debt to give yourself financial peace of mind.
Split Your Refund Between Savings and Debt
If your goals are to pay down debt and save more, consider dividing your refund. You might choose a 50/50 split with half to emergency savings and half to debt.
For example, a $2,400 refund split down the middle gives you a cushion and less debt, and you make progress toward your goals.
Pay Down High-Interest Debt
Focus on credit card or personal loan balances with high interest rates. Carrying a balance with high interest adds up and makes it harder to get ahead.
List your debts by interest rate and use your refund to pay down the highest‑rate balance. Keep paying minimums on the others.
Try the Debt Snowball for Quick Wins
If you’re motivated by seeing a zero balance on your account statements, the debt snowball might be a better fit. This method requires you to pay off your smallest balance first, even if the rate is lower.
Once that first debt is gone, roll the payment you were making into the next smallest balance. Each debt you clear frees up more cash for the next, creating momentum.
Make an Extra Loan Payment
An extra payment on your mortgage or auto loan can reduce the amount of interest you pay . Extra payments go toward principal, which shortens the life of your loan.
This works best once you’ve built a basic emergency fund and paid off high‑interest balances. Before sending extra, confirm with your lender that the additional payment applies to the principal.
Your tax refund is money you already earned. Using it wisely — even applying one or two of these steps — can help you long after tax season ends.