Personal Finance

4 Ways Your 2025 Tax Refund Could Improve Your Finances

Maurie Backman

Published: February 26, 2025 10:22 am

At this point, the 2025 tax-filing season is well underway. And some filers may be within days of getting their refunds, or sitting on that money already.

It’s easy to look at a tax refund as free money to blow. But you should know that a tax refund represents an overpayment of taxes on your part — not a gift from the IRS.

Because of this, it’s important to try to put that money to good use. And here are a few ways you can make sure your tax refund improves your financial picture on a whole.

1. You can use it to build an emergency fund

The Federal Reserve reported recently that roughly one-third of Americans don’t have enough money to cover an unexpected $400 expense. If you’re part of that statistic, it’s imperative that you build yourself a solid emergency fund.

You never know when you might end up having to repair your car, fix something in your home, or pay a large medical bill unexpectedly. Without an emergency fund, you risk racking up debt the moment an unplanned bill arrives.

Similarly, you never know when you might find yourself out of a job. So it’s important to have emergency savings in case your paycheck disappears.

Your ideal emergency fund should be able to cover at least three months of living expenses. So if your savings need a boost, consider putting your tax refund in the bank.

The good news is that a lot of high-yield savings accounts are paying generously right now. So you can potentially earn a nice amount of interest on the money you have earmarked for unplanned bills.

2. You can use it to pay off debt

If you’re carrying a balance on a credit card right now, you should know that for each day it goes unpaid, you’re racking up more interest. So another good use of your tax refund is to pay off debt.

Even if your debt isn’t a credit card balance, if you have a high-interest car loan or personal loan, paying it down sooner could mean spending less money on interest all in. The only reason not to use your tax refund to pay off debt is if it’s debt that comes with a very low interest rate, or if it’s a long-term debt like a mortgage (which, incidentally, may have a low interest rate if you signed your loan or refinanced a few years ago when rates fell to record low).

3. You can use it to start investing

The sooner you start investing your money, the more time you have to take advantage of compounded returns in your portfolio. So if you haven’t yet begun investing, you may want to use your tax refund as seed money for your IRA or brokerage account.

Another option is to sign up for your employer’s 401(k) plan if you have one where you work. This is especially worth doing if your company offers some type of matching incentive.

4. You can use it to further your career

Are there certain skills standing in between you and a better job? If so, you may want to take your tax refund and use it to invest in your professional success.

That money can be used to take a course, attend a seminar, or do other things that set you up for a better-paying position. And earning a lot more money in the course of your career is a great return on investment.