Although everyone seems to dread tax season, it’s a bit easier to deal with when you’re anticipating a refund. In fact, it’s stunning that so many of us wait until the actual deadline to file our taxes because the average refund tends to range from $2,800 to $3,200. That’s not chump change, and it can feel like you’ve had a windfall of free money when your refund arrives. 

As exciting as it is to get your refund, and as tempted as you may be to splurge on something fun to celebrate this “extra” money you suddenly have, pause for a moment to think about where that money is actually coming from. It’s your money! It’s not a bonus, and it’s not free—it’s money you’ve already worked hard to earn. So rather than splurging on something, come up with a sound spending plan.

Now that you’ve decided not to blow it all on something you don’t need, it’s time to figure out the most responsible way to use your refund. Should you put it into a savings account and let it earn a small amount of interest, or should you use your tax refund to pay off debt?

Should I use my tax refund to pay debts or save it? 

You can never go wrong by increasing your savings, but if you’ve got loan debt, which most Americans do, chances are pretty good that your interest rate is fairly high. Your money will go further by paying those loans down rather than putting it into savings.

How much will my tax refund affect my debt?

The amount your tax refund will offset your debt will vary greatly depending on what you’re getting back and what you owe, but it could be quite significant.

Based on the range we mentioned above, if we average that out to about $3,000, that could give you a lot of breathing room depending on your loan debt. Plus, as renowned personal money-management expert Dave Ramsey recommends, if you’re getting that much of a refund, it means you aren’t getting the full value of your money through the rest of the year. Go see a tax professional and revise your filing status; you could end up taking home an additional $250 or more per month rather than letting the government use that money. Ideally, you can use that money each month to pay down your debt.

Here are some of Ramsey’s hypothetical numbers to consider:

Student loan

If you owe the typical $20-25,000 many people have in student loan debt, putting your $3,000 refund toward that and paying your additional $250 per month could cut 18 months off the full length of your loan and save you over $2,000 in interest payments. Of course, that’s if there are no early payment fees, so always check your loan terms.

Auto loan

With the same average $20-25,000 range of debt that many carry in student loan debt, but with a higher interest rate (often over 9% APR) and likely five-to-six-year installment agreement, putting your full refund plus the extra payments towards that could potentially mean you’d own your car years sooner and save thousands of dollars in the process.

Mortgage

When you look at the full amount owed on your home, $3,000 might not sound like it would go far. Think again! Putting your refund plus an additional $250 per month toward your mortgage could have your home paid off a full 10 years sooner and save you tens of thousands of dollars in interest. Then you can start putting all that money towards a healthy retirement plan.

Credit card debt

Not everyone has a mortgage or student loan to pay for, but almost everyone does have growing credit card debt. With high-interest rates and the potential effect on your credit score, there are several benefits in paying off credit card debt. 

Don’t just throw your refund at a random credit card bill, though. If you have more than one, look at your credit utilization on each and try to manage it so that you get one or all down to 30% or less. Also, look at interest rates. If you have any that are in a no-interest introductory phase, it might be more worthwhile to put the refund and additional payments toward one that has high interest. Regardless, paying credit card debt down can save thousands of dollars in interest and improve your credit score significantly.

How much of my refund should I save?

You really need to analyze your debt and what you already have in savings before answering that question. Ideally, you should have at least six months’ worth of your salary saved up just in case. Depending on what you owe and how high the interest rates are, you might be better off paying down your debt immediately and putting additional money into savings each month. There’s nothing wrong with taking a small percentage of that tax refund and putting it into savings for a rainy day, however.

What if my debts are already paid off—can I splurge?

It’s an increasingly rare scenario, but if you don’t have debt and already have a full six-month cushion in the bank for any potential job loss or other emergencies, then splurging still isn’t ideal.

Okay, we get it…it’s always nice to give yourself a little reward, and that can go a long way psychologically, but remember that this isn’t free money you’ve ended up with or a lucky lottery scratcher. This is money you’ve already worked for, so use it wisely.

Going out for a nice dinner or something to celebrate your hard work is fine, but remember that this is money that hasn’t earned interest for you during the year. With debt paid off and your cushion in the bank, it’s much better to put your refund into your retirement account, and since you’ve been so good at keeping debt down, also make sure the additional money you see each month from your new filing status goes to retirement. You can avoid being taxed on it through automatic payroll deduction, and you can have the peace of mind to know that you’re building your nest egg.

What do I do with an emergency expense if my tax refund isn’t here yet?

If you’re about to file or already have filed your taxes and know that you’ll be getting a sizable refund that would cover whatever your emergency expense is, you can use a credit card if you have one with the available credit, or you can get a short-term personal loan online. 

Applying for an urgent personal loan with Helix by Lead Bank is an incredibly quick process, from filling out the initial online application to getting an approval. Plus, if approved, the funds can be deposited in your account within a business day. You can pay for your unforeseen expenses and then pay off your installment loan early with your tax refund to save on interest.