Did you know household debt reached $17.5 trillion towards the end of 2024? While a majority of this debt is due to housing and mortgage costs, nearly $2.74 trillion was associated with credit card debt and auto loans. For many Americans living paycheck to paycheck and facing rising costs, one significant way to make a sizeable dent in their debt is to use excess money like cash gifts, bonuses, and tax returns.

Here are five ways you can use your tax return to get ahead financially. 

1. Start or pad your emergency fund.

Did you know 57% of U.S. adults can’t afford a $1,000 emergency expense? That’s why emergency funds are important when preparing for unsuspected fees, repairs, or bills. This fund is a bank account with money set aside to pay for large, unexpected expenses, including car or house repairs. Experts say these funds should cover three to six months of living expenses and essential bills. If you’re looking to use your tax return as the seed money to start your emergency fund, check out “6 Tips for Building an Emergency Fund” to get started.

2. Pay down debt.

There are plenty of winter-themed debt consolidation and payoff methods, from Debt Avalanche to Snowball, to help you pay down high credit card tabs, outrageous medical and vet bills, or fixed loans like car payments.

• Debt Avalanche: This method involves making minimum payments on all outstanding accounts and using any extra money, like tax returns, to pay off bills with the highest interest rate.
  • According to this method, if you have one credit card with an 18.99% interest rate and a student loan with a 6.25% interest rate, you should use your tax return to pay down the credit card first because it has the highest interest rate.
• Debt Snowball: This method helps you tackle the most manageable debt by paying off the smallest first and then moving on to the biggest. By listing your outstanding debt in order of size, you can focus on which credit card or loan to pay off first. This method also helps build motivation because you’re likely paying off debt faster and seeing a zero balance quicker.

3. Start a college savings account.

Whether you’re returning to school or have a kiddo who may pursue higher education one day, starting a college savings account is helpful when planning ahead. According to Statista, the average annual cost to attend university in the U.S. is nearly $25,000. Large expenses like this shouldn’t be ignored. By using your tax return, you can begin saving and add to it over time. With most banks, you can set up automatic transfers from one account to another, helping grow your college savings. Interested in more ways to save for school? Read “College is a Financial Investment: Here Are 5 Ways to Save.”

4. Fund your entrepreneurial dreams.  

Starting a business or side hustle can be challenging when you lack excess cash. On average, small businesses spend $40,000 in their first year of operation. Whether it’s opening an at-home nail salon or starting a podcast, the costs that come with it are endless. From expensive equipment to filing incorporation documents, you need extra seed money to help make your dreams a reality. That’s where your tax return comes into play. Instead of treating yourself to a vacation, use your tax return to invest in yourself and build a brighter future.  

5. Make home improvements.

Home improvements can cost you an arm and a leg, depending on the project. Instead of spending thousands on repairing your roof or installing a new garage door, you can make several minor budget-friendly changes to add value to your home. Here are five easy things you can do to give your home a face-lift.

• Add plants, shrubs, and flowers to your yard. 
• Upgrade your kitchen appliances.
• Give your house a fresh coat of paint.
• Replace old bulbs with energy-efficient ones/upgrade ceiling fixtures.

Ultimately, it’s your tax refund, and you should use it in a way that makes the most sense for your financial situation. Whether paying off debt or treating yourself to a European vacation, you should always research and budget accordingly.  

For more ways to stay on top of your finances, visit our Savings Tips page at efirstbankblog.com.

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Published: March 17, 2025