Should You Save or Spend Your Tax Refund?

It’s the eternal question that bubbles up every tax season: to spend or save your tax refund?

It can feel tempting to spend it, especially if it’s a larger sum and especially if you feel like you’ve put in the work to budget all year. You deserve a treat sometimes, after all! 

You may also be relying on the refund to pay back some debt, or cover your expenses, which takes the guesswork out of what to do with it altogether. 

For many people, a tax refund is one of the largest financial windfalls they’ll receive all year. According to the IRS, the average tax refund in 2023 was approximately $2,800. That’s no small sum, and it’s easy to see why so many individuals look forward to it annually. 

If you’re grappling between the two options or are unsure what to do with your refund once tax season begins, we’re here to help. 

Reasons to save your tax refund 

Obviously, saving your refund is a wise decision, one that experts would agree is the right one. Here are some reasons you might want to save.

1. To pad an emergency fund. Life can be unpredictable, and experts recommend having at least some money saved in an emergency fund (six months of expenses is recommended but admittedly unrealistic or many of us). However putting your tax refund in there is a great way to boost (or start!) a fund.

2. To invest in your future. The only thing better than receiving money is using that money to earn even more money. Investing your refund in a retirement fund, college savings account or even the stock market will allow it to earn compound interest and turn that refund into a significant asset over time.

3. To reduce your financial stress. Saving your refund can relieve the worry about future financial challenges. Knowing you have a financial cushion can boost your confidence and reduce your anxiety, freeing your mind up for other important things! 

Ways to save 

1. Open a High-Yield Savings Account. Earn interest while keeping your money safe and accessible. 

2. Boost Retirement Contributions. Add to your 401(k) or IRA to maximize tax-deferred savings. 

3. Use an App to Automate Savings. Apps can automatically allocate a portion of your refund into savings or investment accounts. 

Reasons to spend your tax refund

Honestly, if you want to spend your tax refund, you likely don’t need too much convincing to do it. But if you do need some encouragement (or ideas!) here are a few reasons to spend. 

1. It helps the economy. Spending money helps stimulate local businesses and economies. Your purchases are not just existing in a vacuum, they can cause a ripple effect, creating jobs and opportunities.

2. You deserve it. You work hard for your money, and a little self-care or indulgence can go a long way in improved happiness and long term motivation. It can be very fulfilling to see something you bought for yourself as a reminder of the work you have done and continue to do.

3. It can improve your quality of life. Spending strategically on things like professional development, home improvement or even travel can enhance your well-being and personal growth. 

Ways to spend 

1. Plan your purchases: Prioritize buying items or services that serve a long-term purpose or hold significant value.

2. Focus on experiences: Research shows spending on experiences, like travel or classes, can bring more joy than material possessions.

3. Avoid impulse buys: Take time to think over purchases before you commit, especially for big-ticket items. 

What about something in the middle? 

Of course, not everything has to be so definite one way or the other. Putting some money away, while also feeling empowered to spend some of it, might be the right move for you. Here’s how to do that. 

1. Start with a financial assessment: Review your current debts, essential expenses, and savings goals. This gives you a clear picture of where your priorities lie.

2. Split strategically: Divide your refund into fixed percentages for saving, investing, and spending. For example, save 50%, spend 30%, and invest 20%.

3. Align with your goals: Use your refund in ways that reflect your aspirations, whether that’s financial security, a dream vacation, or home improvements. 

The bottom line 

Building good habits around your tax refund can help you build better financial habits all year. Whether it helps you budget, pay down debt or set your financial goals for the remainder of the year. 

There is no right or wrong answer when it comes to using your tax refund. The most important thing to keep in mind is leading with intention, and figuing out a solution that works best for your financial health, growth, security and joy. 

Looking for more ways to take control of your finances? Download our free financial planning guide to get started on your path to financial confidence.