Here's How Your Tax Refund Can Help You Break the Paycheck-to-Paycheck Cycle

With tax season here, you may already have plans for your tax refund check to give your finances extra breathing room -- especially if you're struggling to cover everyday expenses. 

While stocking up on necessities and paying down debt can help your financial situation, your tax refund could also offer an opportunity to start building an emergency fund. 

"A lot of times, when we get something like a windfall, we want to spend it on things that we need," said Daniella Flores, side hustle expert and founder of I Like to Dabble. However, she noted that if you're living paycheck to paycheck, you likely don't have enough savings to help pay for an unexpected expense.

Building a financial cushion is more important than ever to cover things like higher costs due to tariffs or lost income from a layoff. Here's what Flores wants you to know about saving your refund and where you should keep it. 

The great debate: Should you save or pay down debt? 

Deciding which path will give you more financial freedom can be tough. Paying down debt can help you pay less interest as you reduce your balance. That could mean you have more money to save in the long run. However, saving money now can help you cover emergency expenses and start building wealth. 

This year, most taxpayers say they're using their tax refund to pay bills (20%) and pay off debt (18%). However, 16% of taxpayers are putting that money in a savings account, according to CNET's tax survey.

If you're living paycheck to paycheck and feeling nervous about your finances, Flores recommends prioritizing saving over paying down debt for now. You should still make minimum payments on your debt obligations, but having emergency cash in a savings account can help you pay for a surprise bill. Paying down debt can be helpful in the long run, but it won't free up the cash you may need in the short term if there's an emergency. 

Where to save your tax refund 

If your tax refund is automatically deposited in your checking account, move it to a high-yield savings account as soon as possible. Keeping the money in your checking account may tempt you to spend it, and you won't earn as much interest as you would with a high-yield savings account. 

High-yield savings account rates are still hovering around 4% APY for most online-only banks and credit unions. Putting your tax refund in one of these accounts allows you to grow your savings as your money earns interest over time. You'll still have easy access to the money, just like a traditional savings account. And even if your tax refund is the only deposit you make, you'll have a nest egg that puts you one step closer to escaping the paycheck-to-paycheck cycle.