Wondering what to do with tax refunds? Learn how saving your tax refund can help support long-term financial goals.
Filing your tax return may be not fun, but for millions of Americans, the task yields a tidy sum. If you’re one of the many taxpayers getting money back from the government—the average refund was $2,753 in 2023—steering those funds toward your savings is a sound move. With a little bit of planning, that inflow from Uncle Sam can be used to build financial security for you and your family.
If you take advantage of Fifth Third’s Early Pay when filing your taxes by selecting that you would like your refund deposited directly to your Fifth Third Momentum® Checking account, you will get your refund up to five days earlier 1. If you have not requested direct deposit, you can deposit your IRS refund check at any branch or Fifth Third ATM and then steer the money straight into the savings account of your choice.
Your first focus should be building up an emergency fund that can help guard against unexpected expenses or events that could otherwise derail your budget. Putting money aside that you can tap in case of a job loss, medical emergency, or unanticipated household expense will give you the safety net you’ll need to weather unforeseen circumstances.
Experts generally recommend stashing between three to nine months’ worth of living expenses aside, but even a small amount will get you started toward having a financial cushion. And Fifth Third Bank’s emergency fund calculator can help guide you toward setting an appropriate long-term savings goal.
Start Saving Towards a Specific Goal
If you’ve already stashed savings in an emergency fund, consider using your refund to pursue a long-term savings goal. With interest rates edging up, now is a great time to funnel money earmarked for a house down payment, new car, vacation, or other goal into a savings account that will grow over time.
Putting your refund toward reaching a significant goal—or goals—can bring a more meaningful reward than the instant gratification of an impulse purchase. Savings accounts like the Fifth Third Momentum® Savings Account, which lets you create up to four goals at a time and allocate your savings between them, can help. You’ll also be able to set up automatic weekly transfers from your checking account and monitor progress toward your goals with Fifth Third’s mobile app. An online savings calculator can help you figure out how much you’ll need to save each week to reach a particular goal.
Invest Your Tax Refund
Another idea is to invest your tax refund. Investing your tax refund offers a strategic path to financial stability by allocating funds into stocks, bonds, or retirement accounts. It fosters financial discipline, enhances financial literacy, and provides a safety net against unexpected expenses that life may throw your way. Overall, smartly investing your refund can significantly benefit your financial future and goals.
Fight the Urge to Splurge
While it can be tempting to use your refund toward a shopping spree or luxury vacation, there are good reasons to tamp down that urge. At a time when inflation has prices on goods, services, and travel at a relative high, you’ll pay top dollar for everything from airfare and hotels to home furnishings and entertainment.
If you’ve been living on a tight budget and still want to treat yourself, there are ways to splurge responsibly. Experts suggest planning to spend 10%-25% of your refund toward leisure activities or a longed-for purchase and place the rest in savings. Limiting your reward spending will ensure that the bulk of your hard-earned money goes toward a purpose that will benefit you and your family for years to come.
Ways to Save Your Cash
What you plan to use your money for and when you’re likely to want to access it will factor into where to put your savings. For example, funds earmarked for an emergency should be relatively liquid or readily available when the need arises. When saving toward longer-term goals, however, it may make sense to trade less liquidity for a higher rate of return.
Traditional savings accounts, high-yield savings accounts, or money market accounts are all good options that offer both liquidity and growth. If you’re just getting started, the Fifth Third Momentum® Savings Account is a good no-minimum savings account that offers interest rates. You’ll also be able to grow your savings over time by setting up automatic checking-to-savings transfers. You can earn even more interest by taking advantage of money market accounts, such as the Fifth Third Relationship Money Market Savings Account.
If you are able to commit to setting $500 or more aside for a designated period of time, a certificate of deposit (CD) also may offer a higher rate of return while providing the same level of safety as a savings account. CD terms can range from six months to two, three, or even seven years, with longer-term commitments offering higher rates
Finally, once you’ve started your savings journey, it’s important to revisit your short- and long-term financial goals and progress toward them regularly. Your priorities may shift, or you may need to make adjustments to stay on track to reach your goals. With care and attention, using your tax refund wisely can be the first step of a savings journey that will put you in a better place financially.
Looking to open a savings account? Find out which Fifth Third Savings Account is the best option for you.