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5 Smart Ways to Use Your Tax Refund in 2025

Townsend Asset Management Corp. |
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Investments
Finance
Tax Planning

Tax season might not spark joy, but a refund sure can.

In 2025, the IRS estimates the average federal income tax refund will top $3,170.1 That means a lot of folks are suddenly asking the same question: What should I do with it?

Splurge? Save? Invest?

The good news: there’s no one-size-fits-all answer. But there are a few options that tend to deliver more peace of mind and long-term upside.

Here are five smart ways to use your tax refund in 2025, plus practical tips to help you make your money work harder (and smarter).

1. Build or Rebuild Your Emergency Fund

Life happens. That’s why most experts recommend stashing away 3–6 months of essential expenses.

But here’s the reality: nearly 19% of Americans don’t have any emergency savings at all.2

If you’re not quite there yet, your tax refund is a great way to start or give your fund a healthy boost.

How to do it:

  • Figure out your monthly must-haves (housing, groceries, insurance, etc.)
  • Multiply by 3 or 6, depending on how steady your income feels
  • Put the money in a high-yield savings or money market account so it’s accessible, but still earning a little interest

Even adding $1,000–$2,000 to your safety net can make you feel more secure and resilient.

2. Pay Off High-Interest Debt

If credit cards or personal loans are eating into your monthly cash flow, your refund could help knock them out faster.

For example, paying off a $3,000 credit card with a 20% APR saves you about $600 a year in interest.

How to do it:

  • Start with debts charging 10%+ interest (especially credit cards)
  • Use the "avalanche" method, pay off the highest rate first while making minimums on the rest
  • Once one balance is gone, roll that payment toward the next

Less debt = more freedom to save, invest, and breathe easier.

3. Use Your Tax Refund to Build Wealth

Even a few thousand dollars invested today can grow into something meaningful down the road.

If you’ve been waiting to open a Roth IRA or increase your 401(k) contributions, this might be the nudge you need.

How to invest your tax refund:

  • Already have a 401(k)? Consider increasing your contribution by 1–2% and using the refund to “cover the gap” in your budget
  • No IRA yet? You can open one in minutes with a brokerage platform
  • Not sure where to start? A target-date fund or broadly diversified ETF can get you going without overthinking it

Want to see the power of compounding in action? For example, $3,000 invested today might grow to over $12,000 in 20 years, assuming a consistent 7% annual return.

Of course, this is a hypothetical illustration only. Actual investment results will vary and are not guaranteed.

4. Make a Meaningful Life Upgrade

Not everything has to be strictly financial. Sometimes, the best use of your refund is spending it in ways that reduce daily stress or improve your quality of life.

Regular home maintenance is one place to start. The average household spends over $10,433 a year just keeping things in working order.3 Catching up on repairs now can help you avoid bigger bills later.

But life upgrades don’t stop at your front door. Your refund can also fund improvements that make your day-to-day more enjoyable and fulfilling.

Think:

  • Booking a weekend getaway to recharge or reconnect with loved ones
  • Buying tools that support your side hustle or passion project
  • Finally scheduling that therapy or coaching you’ve been putting off

Small upgrades can have a big ripple effect on your energy, productivity, and peace of mind.

5. Invest in Yourself

Your skills, time, and energy are powerful assets. Using your refund to grow them can open doors for more income or more purpose.

Ideas to consider:

  • Take a course that helps you get promoted or pivot careers
  • Hire a career coach or resume writer if you're job hunting
  • Start a freelance side hustle you’ve been thinking about
  • Attend a professional conference or networking event

These moves might not pay off immediately, but they can set you up for bigger opportunities down the road.

Ready to Put Your Refund to Work?

Your tax refund isn’t just “extra” money. It’s a chance to hit reset, make progress, and move closer to the life you want.

And if you’re not sure which move makes the most sense for you? That’s what I’m here for.

Let’s talk about your goals and create a plan that fits. Schedule a quick call, and we’ll map out your next steps.

Sources

  1. CNBC, 2025 [URL: https://www.cnbc.com/select/average-tax-refund-2025/]
  2. Bankrate, 2025 [URL: https://www.bankrate.com/banking/savings/emergency-savings-report/]
  3. Bankrate, 2024 [URL: https://www.bankrate.com/homeownership/most-common-home-maintenance-costs/]

This material has been prepared by a third party that is unaffiliated with Townsend Asset Management Corp. and is provided for informational purposes only. Townsend considers this third-party source and information to be reliable, but its accuracy and completeness cannot be guaranteed. It may not represent the views of Townsend or its affiliates. It should not be considered a recommendation to purchase or sell any particular security. Past performance should not be relied on as an indicator of future results. All investing assumes a certain degree of risk, including loss of principal. Townsend has obtained permission to distribute this material. Townsend Asset Management Corp. is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training.  More information about the firm can be found in its Form ADV Part 2 and Form CRS, which are available upon request. TAM-25-28