What should I do with my tax refund?
After 5 years, in today's dollars, a $3,000 refund that pays down a 24% card leaves the balance $8,588 lower. Invested at 7%: $3,630. In savings at 4%: $3,148. Kept as cash: $2,588.
Example: a $3,000 refund. That's $250 a month of pay held until tax time.
Use your own numbersWhat should I check before spending my tax refund?
A refund feels like a bonus, but it's pay that was held back during the year and returned without interest (definition, opens in a new tab). Where it goes next decides whether it grows, shrinks, or quietly stops debt from growing. Three questions sort out which bucket each dollar of it lands in.
Is any debt charging more than the money could earn?
Paying down a card at 24% APR (definition, opens in a new tab) stops 24% interest, every time. Investments might earn more or less, with no promise. Compare the rates side by side.
Is there cash set aside for a surprise bill?
Cash loses a little buying power each year, but it's there the day the car breaks down. Without it, surprise bills often land on a card.
Why was the refund this big?
A refund is pay that was withheld (definition, opens in a new tab) from paychecks and returned at tax time, with no interest. A$3,000 refund is $250 a month.
Quick guess
Put $3,000 toward a card at 24% APR and keep making the same monthly payment. After 5 years, how much lower is the balance?
Not counting inflation (definition, opens in a new tab). Using the numbers in the calculator below.
What does my refund turn into in each place I could put it?
Enter the refund and the rates that apply. You'll see what the same refund is worth after the years you pick if it pays down a credit card, goes into savings, gets invested, or sits as cash. Every number is in today's dollars (definition, opens in a new tab), so they compare directly.
After 5 years, in today's dollars
- Pays down a card$0
How much lower the balance is, with the same monthly payment. Compounds against you, stopped.
- Invested$0
Compounds for you. Not guaranteed; it can go down.
- In savings$0
Compounds for you, slowly. Insured savings at a bank or credit union.
- Kept as cash$0
Shrinks on its own as prices rise.
Show the math
- Each choice grows the refund at its own rate, then divides by (1 + inflation)years to show it in today's dollars.
- Card: the card charges APR ÷ 365 each day. With the same monthly payment afterward, paying the refund in now leaves the balance lower later by refund × (1 + APR ÷ 365)days. That holds as long as the card isn't paid off before then; once it is, the freed-up payments are yours to use elsewhere.
- Savings and investments: refund × (1 + yearly rate)years, applied monthly.
- Cash: the refund itself, losing buying power to inflation.
- Not included: taxes on interest or investment gains, fees, and new card charges.
What is my refund worth after 1 year and 5 years?
Compounding is slow at first and fast later. After one year, the four choices land within a few hundred dollars of each other. After five, a card balance paid down and money invested have pulled ahead of cash, which loses buying power to rising prices every year it sits.
After 1 year
| Refund used to… | Worth, today's dollars |
|---|---|
| Pay down a card | |
| Invest | |
| Save | |
| Keep as cash |
After 5 years
| Refund used to… | Worth, today's dollars |
|---|---|
| Pay down a card | |
| Invest | |
| Save | |
| Keep as cash |
Those are the three buckets: compounds for you, shrinks on its own, compounds against you.
What can I say to my employer, card company or tax preparer?
A refund is shaped by choices made with other people: how much an employer withholds from each paycheck, what a card company charges, and what a tax preparer offers. Below are short things to ask each of them. Each one keeps more of the money working, sooner.
Payroll or HR
“I'd like to update my W-4 so less is withheld from each paycheck.”
A W-4 is the form that sets how much tax comes out of each paycheck. Less withheld means a smaller refund but more in every paycheck. The IRS has a free estimator to check the numbers.
Card company
“I'm making a lump-sum payment. Can you also lower my APR?”
A lower APR means less interest on whatever balance is left after the refund goes in.
Tax preparer
“Is there any fee for getting my refund early, or for having the fee taken out of my refund?”
Refund advances and fee-from-refund options can cost money. Asking first puts the price on the table.
Tax preparer or tax software
“Can my refund be split between my checking and savings accounts?”
The IRS lets a refund be deposited into up to three accounts (Form 8888), so part of it can go to savings automatically.
Sources
- Internal Revenue Service,Tax Withholding Estimator: check how much is withheld from each paycheck.
- Internal Revenue Service,About Form 8888: splitting a refund into more than one account.
Educational only, not financial or tax advice. The numbers are illustrations based on what you enter. Investment returns aren't guaranteed, and savings rates change.