Are you one of the millions of people eagerly awaiting your tax refund this year? The Internal Revenue Service (IRS) has reported that the average tax refund amount is $2,933 for the 2023 filing year. Though this amount is down more than 11% from 2022 and inflation is still ongoing, nearly $3,000 is not a small sum of money to the average taxpaying American.

It can be incredibly tempting to splurge on something fun when that tax refund check hits your account, but there are much smarter ways to use that money. Your tax refund is a representation of the hard work you put in to earn a living, and making intelligent decisions with that money can have a significant impact on your long-term financial well-being.

If your gut instinct is to go on a shopping spree, take a step back and think about whether or not that killer pair of high heels or expensive espresso maker will still be around five years from now. Even if you still have them, what value do they add to your life?

Instead of spending your tax refund check on something frivolous, make your money work for you. Rather than spending your refund on something to provide short-term enjoyment, consider using it to invest in your future, grow wealth, or improve your financial life. Not sure where to start? Below, we take a look at 12 smart ways to put your tax refund dollars to good use.

1. Pay off debt

One of the most often recommended uses for tax refund money is debt payoff. Because this isn’t money that’s generally factored into your budget ahead of time (unless you’re a math wizard who likes calculating your tax bill), it’s a great resource for “extra” money that can be used to pay down debt.

“Debt affects our mental health so using your refund to bring that down is certainly a good idea,” financial coach, Tatiana Tsoir, CPA, MBA, tells Credello.

Paying down high-interest debt like credit cards, personal loans, or student loans can help you reduce your monthly payments and save money on interest charges over time. It can also improve your credit score and increase your chances of being approved for loans with more favorable terms in the future.

If you decide to go this route, Credello’s debt payoff calculator can help you get started. With this tool, you can add payment (like your refund amount, in this case) to your current monthly debt payment amounts to see exactly how this extra payment can help you save money and reduce your debt. It lets you compare debt repayment options — the debt snowball and debt avalanche methods — plus determine your debt-free date and calculate your interest savings. Try it out here:

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2. Invest in yourself

Looking to level up at your job or even pivot to a new career path? Your tax refund check may be the answer.

Author of Dream Bold, Start Smart: Be Your Own Boss and Make Money, Tsoir specializes in helping people transition from the typical 9-5 work life to running a business. Her advice for using your tax refund funds is to invest in yourself. “Buy that continuing education or certification course you were eyeing that will propel you forward personally or professionally,” she says. “If you are to bet on anyone in this life, why not bet on you?”

Consider signing up for a course, heading to a conference, or buying some books related to your current career or interests. Then, use what you learned to apply for a new role or as leverage when you ask for a promotion.

3. Build your emergency fund

If you don’t already have an emergency fund, use your tax refund to start one. Aim to save three to six months’ worth of living expenses in case of unexpected events like job loss, a medical emergency, or a major unanticipated home repair.

If your emergency savings account already exists, simply add the funds from your tax refund check to it to bolster the amount and provide extra cushion for unforeseen expenses that pop up in the future.

4. Plan for retirement

Consider putting your tax refund into a retirement account like an IRA or 401(k). This is an especially good idea if you haven’t yet started any sort of retirement fund for yourself. “Until about the age of 45 many people don’t think retirement is as close as it is and don’t invest in it,” Tsoir explains. “Yet simply putting away and living without that refund and shifting it into your future, your retired you will thank you.”

Adding your refund check to your retirement fund can not only help you save for your future but could potentially lower your tax bill for next year.

5. Start a college fund

Using your tax refund to start a college fund for your children or yourself can be a thoughtful way to invest in your family’s future. Saving for education expenses now can help alleviate the burden of student loans and give you more financial flexibility in the future.

Plus, with the rising tuition costs and other education expenses, starting a college fund sooner rather than later can help maximize your savings and reduce reliance on loans. Additionally, the tax benefits associated with contributing to a 529 college savings plan — like state tax deductions and tax-free growth on earnings — can be beneficial.

6. Start a business

Take advantage of that business idea you’ve had to float around in your brain for years, or invest in your general entrepreneurial drive and start a business using your tax refund. Creating a business from scratch can be risky, but using your tax refund to fund your venture can help you get it off the ground without taking on significant debt or dipping into your savings.

A successful business can generate steady income and has the potential to help you build significant wealth over time. If you have a passion for entrepreneurship and the skills to start and grow a business, using your tax refund to invest in your venture can be a wise and rewarding choice.

Success isn’t guaranteed, but using your tax refund can help you leap without risking too much. Just be sure to do your research and have a plan before you start. There are so many resources to help you get started, too — the U.S. Small Business Association even has a startup cost calculator to help you figure out if your tax refund amount will cover the costs of starting your own business.

7. Invest

Investing in the stock market can be tricky — not to mention risky. However, there are ways to invest that can benefit your financial future. “Invest it in the market but with a long-term view,” Tsor recommends. “Don’t gamble invest.”

Especially if you don’t have any pressing financial needs where your tax refund dollars can be put to use, making a smart stock investment can potentially yield some hefty gains down the line. Talk to a professional financial advisor to see what your options are and where your investments could best grow.

8. Add funds to your HSA

If you have a high-deductible health insurance plan, consider using your tax refund to add funds to a health savings account (HSA) — a type of savings account specifically for health care expenses. HSAs offer tax benefits and help you save money on medical expenses that may not be covered by insurance, so adding these extra funds to this account can be a big boost. Also, HSAs can help you build a safety net for unexpected medical expenses, giving you more financial flexibility in the future and preventing you from having to use other emergency funds for health-related costs that pop up.

9. Update your home

Another smart use of your tax refund dollars is to use them to make home improvements that will add value to your home. Lower energy costs by replacing your old air conditioning unit, adding insulation, or investing in solar panels. Repair your roof, put in a pool, upgrade your appliances, or beautify your landscaping — the options are plentiful, and you can create a home renovation budget that’s based on your tax refund amount.

And if you can’t make huge improvements to your living space, consider making a few small ones. Making aesthetic updates like repainting or replacing flooring can improve your home’s appearance and make it more enjoyable to live in overall, enhancing your day-to-day quality of life more than a quick one-off impulse buy might. Just make sure you prioritize necessary updates and create a budget to make sure you don’t overspend.

10. Make an extra mortgage payment

Paying down your mortgage early can help you save money on interest payments and reduce the overall cost of your loan. So, depending on how large your tax refund is, making an extra mortgage payment (or two!) can be a clever use of that money. Plus, if you get ahead, you’ll have a bit of built-in flexibility down the road if you happen to hit a financial bump. Before making an extra mortgage payment, check with your lender to make sure there are no prepayment penalties, and that the payment is applied correctly.

11. Purchase life insurance

Life insurance can provide financial protection for your loved ones in the event of your unexpected death and can help cover expenses like funeral costs, mortgage payments, and other bills. Like saving for retirement, a life insurance policy is one of those investments you should make sooner rather than later. By purchasing life insurance with your tax refund, you can ensure that your loved ones are protected and that they have the resources needed to maintain their standard of living after you’re gone.

There are a ton of different ways to purchase life insurance, so before you commit to spending your tax refund, be sure to shop around and compare policies to find the best coverage for you at the most affordable price.

12. Save it

Trying to figure out what to do with those “extra” funds? Simply transfer your refund check to a high-yield savings account or investment account where it can earn at least some interest while you figure things out. Having this savings buffer can also provide peace of mind and help you weather unexpected expenses, income fluctuations, and more. Even if you wind up putting this money to use after some time, the amount will continue growing while you make your decisions.

Bottom line

Ultimately, the best way to use your tax refund depends on your financial priorities. Of course, it’s OK to treat yourself, too, but consider what use of your tax refund check will have the most significant impact on your current financial situation, and then make a plan that aligns with your values and future goals.