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Are you looking for the best ways to save on your tax refunds? We have seven ideas that can help you build wealth with your tax refund.
The April 15 tax filing deadline may strike fear into taxpayers around the world, but the storm cloud also has a silver (or dollar-covered) horizon.
In 2022, nearly 100 million taxpayers received a refund the average refund is $3,039. This sizable payday could be the money you need to secure financial stability and a growing net worth.
Here are the best ways to save on your tax refund.
Decide how much you want to save
Your tax refund may feel like “free money,” but it’s not. You've earned this money through hard work throughout the year, but it's difficult not to treat it like extra money.
Find out how much of your tax return you will save and how much you will spend. Maybe you want to save 90% of the refund and spend the remaining 10%. You can choose to spend half and save half. Whatever you decide, commit to saving the money before you start spending.
Once you've decided how much you want to save, you need to decide how you want to save it. To save your tax refund, you generally need to transfer your money from your checking account to another account. Our list can help you decide how best to save on your refund.
Build a buffer in your checking account
If you frequently pay overdraft fees, having a buffer in your checking account can save you a lot of money and stress.
In general, a checking account is a poor way to save money. It's tempting to overspend when you have too much money in the account, and you can expect a low return on your money. However, a small financial buffer in your checking account can give you enormous security.
If you have a buffer, you can pay your bills automatically and avoid all kinds of late fees and overdraft fees. Budgeting becomes much easier when you don't have to worry about perfectly matching payments and paychecks. If your checking account is regularly close to $0, consider using your tax refund to build a small buffer in your checking account. Otherwise, skip this recommendation and consider one of the other options.
Increase your savings in an emergency
Most financial experts recommend prioritizing emergency savings over all other financial goals. Saving three to six months of basic expenses can help you weather big financial storms like losing your job or other setbacks.
If you don't have an emergency fund, open a new high-interest savings account at a bank that doesn't have your primary checking account. Separating checking and emergency funds will ensure you don't accidentally spend your emergency funds on an emergency trip to Jamaica. Currently, the best savings accounts offer interest returns of over 5% per year, making saving well worth it.
Check out our list of the best high-yield savings accounts.
Pay off high-interest debt
Once you have a buffer in your checking account and emergency funds, it's time to tackle your high-interest debt. The Federal Reserve Economic Data (FRED) showed that the average interest rate on credit cards was over 22% in November 2023. Paying off credit card debt guarantees a huge return on your investment.
Not sure which debt to pay off first? We give you step-by-step instructions on which debts you should tackle first.
Invest in a Roth IRA
With an emergency fund in place and high-interest debt eliminated, you can grow your wealth.
When investing, you put your money at risk and expect your money to grow over the long term. The first place to start investing is a Roth IRA. You can open a Roth account with most major brokerage firms. A Roth IRA is a retirement account. For 2024, you can donate up to $7,000.
A Roth IRA is a tax-advantaged investment account. You have already paid taxes on the money you deposited into the account. Money you keep in the account grows tax-free, and you don't have to pay taxes when you withdraw money from the account in retirement.
If you deposit $3,000 today and earn 8% annually, your investment will grow to over $30,000 in 30 years. If you donate $3,000 per year, you can expect to make over $370,000 in 30 years.
Remember that the value of investments can fluctuate and it is normal for the investment value to fall and rise. When investing for retirement, the best thing you can do is invest your money and leave it alone.
Related: The Best Places to Open a Roth IRA
Save for your child's education
Parents may want to invest in a 529 plan for their children. A 529 plan is an investment account where growth is not taxed as long as the money is used for education expenses. Some states even offer tax credits or deductions for parents who use these accounts.
Even if saving for retirement is more important than funding a child's education, this type of saving can be worthwhile. Saving for college costs can help limit your child's burden of student loan debt. This knowledge can be motivating for parents, especially when you remember how hard you had to work to pay off your own debts.
Start investing in real estate
When your retirement planning is on track, investing becomes even more fun. With a few thousand dollars you can start investing in real estate. You can't buy a house with your tax return, but you can invest through real estate crowdfunding.
You can also save the money and add to it over time. With a large enough cash stash, you'll have enough money for a down payment on a house. You could then rent the house, live in it, or do both. House hacking involves living in part of the house and renting out the rest. This is one of the best ways to safely enter the world of real estate investing.
Consider alternatives
Alternative investments are any investments that you cannot buy, sell or trade through traditional financial markets. Real estate is a type of alternative investment, but alternatives also include crypto, art, land, precious metals, and more. You don't necessarily have to invest in alternatives, but many investors want to learn about investing in this asset class and invest a portion of their portfolio in alternatives.
Many alternative investments are very speculative. These investments could take years to pay off, or they could go to zero. We recommend only investing in alternatives if you meet your financial goals and have money left over for riskier investments.
Final thoughts
While this list suggests an order of operations to save money, you don't have to follow these recommendations. By saving and investing money, you can increase your net worth over time. Your tax refund could be your biggest source of “extra” income this year. Anything you can do to save money will help you increase your net worth over time.
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