Here’s the No. 1 Thing You Must Do With a $1,000 Tax Refund, According to Experts
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Angela Mae
6 min read
Right now, the tax filing season is off to a strong start. Although individual income tax returns are still coming in, the IRS has already refunded over $13 billion to taxpayers. The IRS has also reported that the average tax refund sits at $1,741.
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But not everyone expects to receive such a high amount. A recent GOBankingRates survey found that 24% of individuals expect a refund of just $500 to $1,500. Only about 6% of people said they anticipate a refund closer to the current average for this year.
“The number one priority for someone receiving a tax refund of approximately $1,000 should be to reinforce their financial security,” said Dana Ronald, CEO of Tax Crisis Institute.
This might look like different things to different people. For some, it could mean starting an emergency fund or paying down debt. For others, it could mean setting aside that money in a savings account where it provides a financial buffer in case something comes up.
Pay Off High-Interest Debt
If you already have some level of financial security, the next most important thing is to use that tax refund to pay off high-interest debt, according to Ronald.
“This includes credit card balances, personal loans or other debts with steep interest rates. Doing so can save a significant amount of money in the long run and improve your overall financial well-being,” said Ronald.
“Consider using the snowball method by paying off smaller debts first, then applying that payment to larger ones for faster progress,” he continued. “Remember, being debt-free is an essential factor in achieving financial stability and success.”
“When you receive your tax refund, always pay down your interest-bearing debt, before considering investing/spending the money,” added Dr. Lei Han, Certified Public Accountant (CPA) and Associate Professor of Accounting at Niagara University.
“As a lawyer and personal finance expert, I tell people the number one priority when receiving a modest tax refund is to bolster their emergency fund,” said Erika Kullberg, founder of Erika.com.
Remember that an emergency fund isn’t the same as your typical savings. The money is primarily meant for unexpected expenses, like medical bills, a lost job or car repairs. It’s a safety net in the face of these emergencies.
“People should aim to set aside at least three to six months’ worth of living expenses in a high-yield savings account or money market fund so that it still earns interest, putting that money to work,” added Kullberg. “Allocating your tax refund towards your emergency fund can provide peace of mind and protect you from financial hardship in the event of unforeseen circumstances.”
While $1,000 won’t be enough to max out your emergency fund, it’s a start. By regularly contributing to your account, you’ll build more financial security than you might have now.
Invest in Yourself
Receiving that extra $1,000 probably feels good, but try to refrain from spending it on things you don’t really need.
“After receiving a tax refund, it can be tempting to spend this money splurging on something fun, but investing in healthy financial habits is a better way to use this cash,” said Thomas Racca, manager of the personal finance management team at Navy Federal Credit Union.
If you don’t have any high-interest debts, or if you’ve already paid them down to a manageable amount, you might want to invest in yourself and your financial future.
“Your tax refund presents a perfect opportunity to boost your savings and invest in yourself,” said Racca. “Oftentimes, it can be difficult to think far into the future and feel tricky to find ways to contribute to your savings, but this is a foolproof way to make a difference.”
As for investing in yourself, you could use that money to pay for courses, workshops or books to help you build your skills and potentially improve your future financial situation.
Plan For Major Expenses
The second thing Racca suggested doing with a small tax refund? Plan for future expenses.
“Are you planning on growing your family? Are you planning to go on a big vacation? Are you planning to start a college fund for yourself or a loved one? Your tax refund is a great way to get ahead on saving for future plans,” said Racca.
To keep your savings for these goals on track, use a separate interest-bearing account — ideally one you don’t have regular access to.
“I recommend opening a separate account to keep these funds sequestered from your daily spending and saving habits,” said Racca. “Additionally, keep it out of your normal account view, removing the temptation to use those funds for an unintended purchase.”
The Takeaway
Everyone’s financial situation is different, so the best thing for you to do is ultimately up to where you’re at right now and where you want — or need — to be. Once you know that, you can decide the best option for your tax refund, no matter how large or small it is.
“While a small tax refund may not seem like much, it can still have a meaningful impact on your financial well-being when used wisely,” said Kullberg. “By prioritizing the building of an emergency fund and paying down high-interest debt, you can set yourself up for greater financial stability and security in the future.”
And what about if you want to use that money on something fun like a vacation or new wardrobe? Consider your financial security first.
“Even if you do splurge with a portion of the money, ask yourself if you are one of the many Americans that does not have enough cash on hand to handle a $500 emergency,” said Racca. If you are, put that refund away for a rainy day so that you have a buffer, just in case.
