Treat your 2025 federal income tax refund as something of lasting value that can reduce your debt load or fund a financial need or want. Can you enjoy the “found money”? Yes, but use it for a purpose.
Plan 1: Start or replenish an emergency fund
Concerned about your job security or health? Set aside three to six months’ worth of living expenses in an emergency fund by opening or adding to a savings or money market account dedicated solely to emergencies.
Keeping the funds separate from your everyday checking account will make you less likely to tap the account balance for non-urgent needs; the higher interest rate than what a checking account earns will help your safety net grow steadily over time.
Tropical Financial Credit Union offers several ways to save, such as its Savings Club and money market accounts.
Plan 2: Pay down your debts
Identify which debts cost you the most to use your refund where it will have the greatest impact. First, prioritize your debts by interest rate, not by balance. A high-rate credit card charging an annual percentage rate of 20% or higher drains your budget far faster than a low-rate student loan or a 30-year mortgage. Every dollar used to pay down high-interest credit card debt is essentially earning you a “risk-free return” at that same rate.
You can also put funds toward medium-rate loans, such as car or personal loan balances, which often carry rates in the mid-single to low-double digits. The money goes directly toward the principal, which can shorten the loan term.
For low-interest-rate debt, like a 30-year fixed-rate mortgage, the decision may depend more on your personal goals than pure math. The benefit is usually smaller than what you would gain from first reducing or eliminating high-interest credit card debt.
Still not sure what to do? Consider the “debt avalanche” method, which focuses on first paying off the highest-interest balances while making minimum payments on the other debts. This well-established strategy minimizes the total interest you will pay over time and speeds up overall progress. Not enthused? Try the “debt snowball” method, in which you first pay off the smallest balances. Those quick wins can motivate you to tackle bigger debts.
Plan 3: Save the money for rewarding purposes
If you have already set aside money for an emergency, your debts are minimal and you’re saving for the future, deposit the check into a discretionary account. Tropical Financial offers certificates of deposit that pay competitive returns.
Use the money to pay for a vacation, fund a hobby, or some other personally rewarding purpose. Be intentional, not spontaneous or frivolous with the funds. Keep transferring even just the smallest part of your paycheck into the account so that it keeps growing. Then, when the opportunity arises to take a dream adventure, the money will be there to make it real.