5 Ways to Spend Your 2024 Income Tax Refund

A check from the United States Treasury lies on top of a 1040 tax return form.
(Adobe Stock)

Are you like most American tax-filers and about to receive a tax refund? Last year, the IRS reported that more than 60% of taxpayers fell into that category. If so, I have a question: What are you going to splurge on?

You didn't think that was where I was going, did you? You probably thought I would steer toward telling you to pay off debt, save or invest it? Or maybe you thought I would focus on tax tips and that getting a refund is a financial mistake in the first place? That you should change your withholding, so you keep more of the money in your paycheck rather than receive a refund?

Well, I believe there is merit in all of those things I -- sort of -- didn't say. Of course, I'm going to tell you to be financially responsible with your tax refund. After all, that's what I do best. But in addition to being a financial planner and cheerleader, I'm also human. So I get it. The urge to buy something nice with some "found money" is just as real for me as it is for you.

However, with the financial planner part of my brain, slightly influenced by my human being's heart, I'd like to share my top five tips for what to do with your tax refund.

1. Buy Yourself Something Nice!

You know you were going to do it anyway, so telling you to take all of your money and be financially prudent with it probably won't help you much. Plus, I really believe that treating yourself to something special is a good strategy -- just don't overdo it! Pick a percentage to use (maybe 10%-20% of the refund amount?) and have some fun with it. Then, yes, be responsible with the rest.

2. Create or Shore Up Your Emergency Fund

Do you ever feel like you're living paycheck to paycheck, or that your cash reserves are always uncomfortably low? Well, getting an influx of cash is a great way to fix that. Typically, I recommend an emergency fund of 3-6 months' worth of your committed expenses. Set this aside in an account that's separate from the one you use for your day-to-day finances and bill-paying. And given the recent uptick in interest rates, make sure your money is working hard.

3. Pay Off Consumer Debt

If you are among the millions of Americans with credit-card debt, this could be a good opportunity to clean the slate (or at least part of it). If you have multiple cards and can't pay them all off, consider paying off the smaller balances first to give you a sense of accomplishment.

4. Fund Upcoming Expenditures and Experiences

You probably have a laundry list of events and activities upon which you know you will spend money this year -- vacations, sports, gifts, travel, etc. Why not use some of your refund to set aside cash specifically earmarked for these purposes? This way, your cash flow won't be as stretched when the time arrives. It's important to separate this cash from your emergency fund because these things aren't emergencies, and as specific amounts are earmarked for specific purposes, you'll be more likely to stick to your planned spending amounts. I personally set up separate savings accounts specifically designated and nicknamed for these expenditures, and it works great.

5. Jump-Start a Savings Program

Do you have a savings goal you've been meaning to start, but you just couldn't get excited about putting away a small amount of money toward it each month? Dropping a lump sum into such a plan often makes it easier to get over the initial hurdle of getting started.

If you're about to get a substantial income tax refund, I encourage you to make the most of the opportunity. Are you just going to buy yourself something nice? Or are you going to buy yourself a future, too? Why not try a little bit of both?

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