Tax season is here. That means gathering documents, choosing how to file and, if you're fortunate enough to earn a tax refund, planning where to store or use it. Before planning that dream vacation or making a huge purchase, you'll want to keep inflation in mind as it pertains to using your tax refund.
One of the first considerations for your refund is to strategize ways to make it work for you while outpacing inflation.
The core inflation rate is currently 3.2%. Rising prices on food, shelter and energy continue to be the main culprits for price increases. Moreover, if President Donald Trump goes through with imposing tariffs, inflation could rise. The president proposed a 25% tariff on goods from Canada and Mexico, and a 10% tariff on goods from China.
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This means it's ideal to be proactive in planning for price increases, even if they don't happen. Here are some options to consider.
High-yield savings accounts: A flexible way to grow your refund
A high-yield savings account allows you to earn a great rate of return. Before the Federal Reserve cut interest rates three times, my savings account had a 5.00% APY. Compared to your standard brick and mortar options, the amount I earned in interest in one month with my online bank would have taken years with a traditional option.
Using our tool from Bankrate, you can explore some of the top savings options:
If you plan to use your tax refund for a high-yield savings account, keep in mind that the interest rates are variable. That means if the Federal Reserve cuts interest rates again, your rates might dip. That aside, it's a great vehicle to park your money and earn a higher rate than inflation.
One of the biggest advantages of a high-yield savings account is its flexibility — you can deposit and withdraw funds as needed without locking your money away for a set term, unlike a CD. This makes it an excellent option for building an emergency fund while earning competitive interest.
Lock in your tax refund with a fixed-rate certificate of deposit
A certificate of deposit (or CD) is a great savings vehicle for short-term goals. It's essentially an account where you park money and forget about it, with terms ranging from three months to 10 years.
A great aspect of CDs is that you receive a fixed interest rate, meaning if the Federal Reserve cuts rates again in the future, it won't impact your earnings. This stability makes CDs a reliable option for those seeking predictable returns.
Check out some of the best options:
The only drawback to CDs is you can't withdrawal funds from them or add money to them once you sign up for the account. If you need to withdrawal money before the term expires, the penalty fee might offset any interest earned. Therefore, CDs are smart options if you're sure you won't need to touch the money for the term's duration.
Invest your tax refund for the future: Build wealth and boost your retirement
If you're receiving a sizable tax refund, you might consider padding your retirement with it. While this option carries more risk than a high-yield savings account or a CD, you also could earn a higher rate of return as well.
One of our favorite online brokers is Fidelity. With the Fidelity Go feature, investors with less than $25,000 in their account receive free investment advice. And if your portfolio exceeds this amount, you'll have access to human advisors for a fee of 0.35% of your assets.
Pay down high-interest debt
Sometimes surprise expenses happen, and it's becoming more frequent that people use credit cards to fund these surprises. If you find yourself carrying a balance on your card with a higher interest rate, paying it down first is integral.
However, this becomes a delicate balancing act if you don't have savings built up. This is where you'll want to institute the 60-30-10 budgeting method moving forward. How it works is you devote 10% of your income to savings. Over time, it will help you prepare for unexpected expenses that might arise. And if you need help tracking your money, our best budgeting apps can help.
The bottom line
It's officially the start of the tax season. Here are some of the top software options if you plan to self file:
Meanwhile, if you're receiving a tax refund this year, you'll want to put it someplace where it outpaces inflation. Two surefire ways (at least for now) are to save with a high-yield savings account or a CD. Both options could help you earn close to a 4% rate of return.
You could also pad your retirement with an online broker. And if you're carrying some high-interest debt, you'll want to chip away at that while also building a savings through budgeting. That way, you get debt off the books and still have money going into an account that outpaces inflation.
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