Tax Refunds Are Hundreds Higher This Year: 5 Things to Do With Your Windfall

Getting a tax refund always feels like finding a crisp $100 bill in an old winter coat. But this year, that coat is holding a lot more cash.

According to recent data from the IRS, the average tax refund is sitting at $3,804. That’s up 10.2% — or about $351 — from the same time last year.

Why the sudden jump? You can thank the new tax laws passed last year, which expanded standard deductions and eliminated taxes on tips and overtime.

Now, I could lecture you about how a refund just means you gave the government a massive interest-free loan. And yes, you should probably adjust your W-4 withholdings. But right now, if you’ve got a pile of cash sitting in your checking account, you need a plan.

Here’s how to make that windfall actually work for you, so you don’t look back in July wondering where it all went.

5 things to do with your windfall

1. Crush your high-interest debt: Let’s be honest. If you’re carrying credit card debt at a 24% interest rate, you’re losing money every single day. Taking your refund and wiping out a credit card balance is an instant, guaranteed 24% return on your money.

You can’t find a legitimate investment anywhere in the world that guarantees those kinds of numbers. Knock out the debt first. (See “The Best and Worst Ways to Destroy Debt.”)

2. Supercharge your emergency savings: Life is incredibly expensive right now, and unexpected expenses aren’t a matter of if, but when. Your car will need new brakes, or your water heater will decide to quit on a Tuesday.

If you don’t have three to six months of living expenses set aside in a high-yield savings account, use your refund to get there. (See “25 Tips for Saving Money If Your Budget Is Stretched Thin.”)

3. Jump-start your retirement: Time is the most valuable asset you have when it comes to investing. If your debt is handled and your savings account is healthy, consider funneling that tax refund straight into a Roth IRA or your workplace 401(k).

If you invest $3,800 today and never add another dime, it could grow into more than $26,000 over 25 years, assuming an average 8% annual return. That’s how wealth is actually built. (See “8 Ways to Maximize Your Traditional or Roth IRA.”)

4. Handle delayed home or car maintenance: Ignoring a funny noise in your car engine or a slow leak under the sink will always cost you more in the long run. Using your tax refund to handle preventative maintenance is a highly practical way to protect your assets. Fix the roof now so you aren’t paying for major water damage later.

5. Spend a little on yourself: I’m a financial writer, but I’m also a realist. If you try to be 100% disciplined all the time, you’ll eventually burn out. Take 10% of your refund and do whatever you want with it. Go out for a nice dinner, buy those concert tickets, or upgrade your coffee machine.

Take care of your financial future with the bulk of the money, but give yourself permission to enjoy the present.

The bottom line is that a larger tax refund gives you a rare opportunity to get ahead. Make a deliberate choice before the money simply evaporates into everyday spending.