(NEXSTAR) – If you beat the tax filing deadline and managed to get a refund as well, you may be wondering what to do with the sudden influx of cash.
The average refund in 2024 was $3,011, according to the IRS, up from $2,878 the year before – but should that money go to paying down debt, investing or maybe a summer vacation?
While everyone’s financial situation is different, experts have a few tips to consider after receiving a tax refund.
What to do first?
With inflation driving up the cost of basic necessities and the boon of stimulus checks an increasingly distant memory, many Americans may be balancing credit card payments and attempts to sock money away in savings or retirement accounts.
“In many cases what we’re seeing is emergency savings have been wiped out, we’re seeing a slight uptick in revolving debit,” Arijit Roy, head of consumer segment & solutions at U.S. Bank told Nexstar. “All of that is to say that the ideal situation would be to first when you get the refund check use as much of it as possible to tackle any outstanding debt.”
Roy says the most important types of debt to target are the ones that are revolving or don’t have fixed rates, like credit card debt.
“If upon reflection, it feels like look, that’s not a major issue, then padding or re-padding your emergency savings is actually a really important step because we’re seeing the outflow of savings,” Roy said, adding that today’s high interest rates are rewarding savers who put money in CDs, savings and money market accounts.
Many financial experts advise stashing away at least three to six months’ worth, but Erika Kullberg, a lawyer and personal finance expert, thinks that amount should be more.
“Especially now, it feels like six to nine months is a better benchmark,” Kullberg told CNBC in a recent interview.
If you need to pay off debt before expanding your emergency fund, financial expert Jeff Massey recommends using the “snowball effect.”
Massey says focusing on paying down the card with the highest interest rate will save money, and you should pay minimums on everything else.
“When you pay that [card] off, take all of that money that you are paying monthly and bring it to your next credit card,” Massey told WPRI.
Tricks to saving?
While interest rates are high, so is the cost of groceries, rent, energy and just about everything else, which can make it hard to save while enjoying the same lifestyle.
Roy says one important thing to do is to take one’s approach to the tax refund and apply it at other times during the year. Whether it’s an “extra” paycheck month, a bonus at work or some other unexpected influx of cash, treat it the way you would that tax refund, whether it goes to an emergency fund, debts, retirement savings or other financial goals.
Another effective way to save, Roy says, is to embrace compound interest and start small.
“Maybe in the first week you save $1, or $10 or $100, and in the second week you save $2, or $20 or $200. There will come a point when you’re like ‘I can’t do more,’ but compounding interest is so powerful,” Roy said.
Finding ways to save is increasingly important, experts say, as credit card debt continues to soar.
The overall U.S. economy is in better shape than many forecasters thought it would be a year ago, Shernette McLoud, an economist with TD Economics wrote in a February report, “However, more recently that spending is increasingly being financed by credit cards.”
“You have these noticeable pockets of consumers — mostly middle- and lower-income renters who have not benefitted from the wealth effect of higher housing prices and stock prices — who are feeling financial stress and that’s driving up these delinquency levels. They’ve been hit very hard by inflation,” said Warren Kornfeld, a senior vice president at Moody’s, in an interview.
Earlier this year, the Federal Reserve Bank of New York found that credit card balanced had jumped by $50 billion in the fourth quarter of 2023, soaring to a record $1.13 trillion.
The Associated Press contributed to this report.