Getting a tax refund from Uncle Sam can be exciting. After all, pocketing unexpected money can help you afford things that previously seemed out of reach, like home improvements or bucket list travel destinations.

However, before you blow your entire refund, it pays to consider how to use that extra cash to improve your financial future. Let’s look at savvy ways to put your refund to work.

How much is the average tax refund?

Refund amounts vary based on many factors, but according to IRS filing season statistics direct deposit payments are averaging just over $3,000 this year.

It’s worth pointing out that getting a big refund isn’t necessarily a good thing. After all, the IRS is simply giving you your own money back. By letting the feds hold onto your money all year, you're essentially making an interest-free loan to the government.

If you consistently get issued large refunds, work with a tax adviser to correct your federal tax withholdings so you won’t have to wait for next year’s tax season to get a big boost to your bottom line.

Read more: 7 ways to file your taxes for free

5 ways to use your tax refund wisely

1. Start an emergency fund

Been meaning to put away some savings but keep getting sabotaged by unexpected bills? A tax refund is the perfect seed money for an emergency savings fund. Emergency savings, sometimes called rainy day funds, can help support your family during a job loss or front the money for unexpected costs like car or home repairs.

How much should you have squirreled away in an emergency fund? Any cash is better than nothing, but experts encourage putting away savings equivalent to three to six months' worth of expenses.

Read more: What is an emergency savings fund?

2. Add to your savings

Dumping a sizable portion of your refund check into a savings account to keep it safe from impulse buys isn’t a bad idea. But it’s important to remember that not all savings accounts are created equal when it comes to interest rates.

You’ll get more bang for your buck by leaning into high-yield savings accounts, money market accounts, or a high-yield certificate of deposit (CD). While those high APYs are a big benefit, there are some drawbacks, such as restricted access to your funds and scheduled minimum deposits. Understanding how these accounts work before adding extra cash to those balances is crucial.

And be sure you choose a bank that’s FDIC insured.

Read more: High-yield savings account vs. CD: Which is right for you?

3. Pay off high-interest debt

One of the most valuable things you can do with your refund check is to pay down debt. Eliminating your credit card debt, paying down medical bills, and tackling any other debts with interest in double-digit territory is a solid investment in your financial future.

If you don’t have high-interest debt, you can make extra payments on student loans, a car loan, or even a home loan that you might not otherwise be able to afford.

Read more: The best ways to pay off credit card debt

4. Put your refund check toward retirement

Thanks to the magic of compound interest, putting your refund check into a retirement account is an investment strategy that pays serious dividends. Adding $2,827 (the average refund in 2023) into a typical IRA could turn your refund check into upwards of $20,000 after 25 years.

However, before you decide to use all your extra money to pad your retirement fund, double-check the contribution limits for a traditional IRA, Roth IRA, and 401(k). If you’ve already contributed the maximum, you may want to add funds to your health savings account (HSA) instead.

Read more: These are the new traditional IRA and Roth IRA limits in 2024

5. Invest in your financial goals

Take some time to carefully consider your priorities and devote the windfall from your taxes toward your personal finance goals. Some possibilities include:

• Contributing to a 529 college savings plan

• Investing in career training with the Lifetime Learning Credit

• Start a brick-and-mortar business or online store

• Purchasing life insurance

• Funding home improvements

Read more: Tax refund schedule: Here’s when you’ll get your 2024 refund

Frequently asked questions (FAQs)

1. How long does it take to get the average refund?

According to the IRS, they can issue most refunds to taxpayers within 21 calendar days. However, if you mail a paper tax return, that process can take a week or more longer than using the IRS e-file options. Once you’ve filed, you can check your refund status and see if it’s been deposited to your bank account using the IRS Where’s My Refund tool.

2. How are most Americans spending their federal tax refunds?

The majority of Americans surveyed last tax season said that rather than save money, they used their tax refunds primarily to pay off debt or put toward existing bills. Only about a third of Americans said they were putting their refund checks in savings.