Best Ways to Use your Tax Refund to Get Your Finances on Track

By Emory Clark

According to the IRS, more than 142 million people received tax refunds in 2025, and the average amount they received was $2,852. 

For most people, that’s enough money to make major improvements in your finances!  But only if you put the refund to good use.  

Sure, you can use the money to take a vacation, go on a shopping spree or make a down payment on a car, but if you use it to pay off debt or jump-start your savings instead, it can improve your overall financial stability.

Here’s how we recommend using your tax refund to get your finances on the right track.

What is a tax refund and why do you get them?

A tax refund is not free money, but rather it’s a refund you get when you pay more taxes than you owe. If your employer withholds too much money from your paycheck to pay your estimated taxes throughout the year, the extra money will be returned to you in the form of a tax refund.

Is a tax refund good or bad for your finances? 

It depends. If you get a large tax refund, it usually means you had too much money taken out of each paycheck for your taxes. For example, if you get a tax refund of $2,000 and you have 26 pay periods per year, your employer withheld around $78 too much from each paycheck, or about $167 each month.

If you had that money available each pay period, you could have used it to help you cover things like bills and loan payments, and you could have saved money in interest charges. So if you get a large tax refund each year, you may want to talk to your HR or payroll representative about reducing your withholdings.

On the other hand, if your employer withholds too little from each paycheck, you could end up owing money when you file your taxes.

5 smart ways to use your tax refund to improve your finances

When you get a big tax refund, you have a rare opportunity to make more progress toward your financial goals. Here are some of the best ways to leverage the situation and improve your finances.

1. Pay down debt

If you have high-interest debt, such as credit cards or payday loans, one of the absolute best ways to improve your finances is to pay your debt off as quickly as possible. Until the debt is eliminated, the interest charges will undo any benefits you get from saving or investing. 

If your tax refund isn’t enough to pay off the full balance on your credit cards or other high-interest debt, or if you simply want help with developing a debt management strategy, reach out to an NFCC-certified credit counselor today! 

2. Build an emergency fund

In a report from the Federal Reserve on U.S. households’ economic well-being in 2024 and 2025,  37% of adults said that they didn’t have enough money to cover an unexpected expense of just $400.

What does that mean when it comes to your tax refund? If you don’t have money in savings, it’s crucial to create an emergency fund for yourself and your family. In other words, you need a savings account you use just for unplanned but necessary expenses, like medical emergencies or covering your bills if you get laid off. 

When you have money saved for emergencies, you won’t have to turn to predatory loans, like car title loans or cash advance loans, to cover your urgent expenses. Additionally, you won’t have to charge those expenses on a credit card.

How much should you save for emergencies? We recommend starting with whatever amount you can afford, and then working your way up to three to six months worth of your monthly expenses. If you have dependents, or if your income is inconsistent, aim for saving closer to six months. We also recommend putting the money into a high-yield savings account (HYSA).

Read more: Five Tips for Overcoming a Financial Emergency

3. Cover your health expenses

It might seem counterintuitive to say that you should spend more money. But when it comes to your health, spending more money on basic care and preventative services can save you a lot of cash in the long run.

If you’ve been putting off check-ups, dental work, or buying medical devices you need, getting a tax refund is a great opportunity to schedule your appointments or cover these expenses.

Additionally, consider putting money into a health savings account (HSA). If you have a high-deductible health plan (HDHP), you can use one of these savings accounts to help you save for medical expenses and even supplement your retirement investments. Here are some of the key benefits you get from using an HSA:

• Your balance earns interest.
• Your contributions help reduce your tax bill.
• The money rolls over from year to year, with no expiration.
• You can use the funds to pay for qualified medical expenses for you, your spouse and dependents.
• Unlike retirement accounts, the money you contribute is not taxed when you contribute or when you make a withdrawal, and your interest isn’t taxed either. 

4. Boost your retirement savings

If you’ve crossed off the first three items off this list, and you’re still wondering how to put your tax refund to use, the next option to consider is increasing your retirement savings.

According to the Federal Reserve report we mentioned above, the majority of Americans (67%) have money in a retirement account. However, only 35% believe they have enough saved based on their age.

One way to change that is by using your tax refund to increase your annual retirement contribution. If your employer matches your contributions, you may even want to temporarily increase your automatic contribution from your paycheck, and use your tax refund to supplement your reduced take-home pay, until you’ve spent your full refund.

Just make sure you check the annual contribution limit for your retirement account so you don’t exceed it, since doing so can result in a hefty penalty.

5. Start a side hustle or small business

Have you been thinking about starting a side hustle or shifting career paths and launching your own business? Having a lump sum of cash can make a major difference in helping you get started. 

If you’re clear on your business idea, you might use the money to help you:

• Launch a website
• Pay for marketing
• Create a logo and branding 
• Pay for a business course or certificate
• Purchase supplies or equipment

Fortunately, you don’t have to figure all of this out on your own! If you want guidance on how to get started, or even if you already own a small business and you want help improving your business finances, the NFCC can offer you one-on-one small business counseling.

Emory Clark is the lead attorney at Clark & Washington, LLC.  Their bankruptcy lawyers in Nashville TN offer sound financial and legal advice in bankruptcy cases. Clark & Washington’s exclusive work on Chapter 7 and 13 bankruptcy cases allow them to advise and counsel their clients through each step of the process.