Tax season is a special time of year. For a lot of people, it comes with the delivery of extra cash in the form of a refund. While it may be tempting to spend this on something fun, you’ll want to sock it away in an emergency fund. Here’s why.
Why Is an Emergency Fund Important?
An emergency fund provides a security cushion for when things go wrong.
Let’s say your cat swallows a ribbon and needs emergency surgery, or the car you need for work blows a tire. These unexpected expenses might cost too much for the cash you have on hand. Your emergency fund is a special reserve you can tap into any time your outgoing expenses outweigh your income for that month.
Without savings, you can still handle unexpected emergencies, but you may have to borrow money. Plenty of people put an unexpected vet’s bill on a credit card, but if you’ve maxed out these accounts, an installment loan can be a backup.
You can find cash installment loans online with convenient and fast applications. However, like any personal loan, online installment loans come with finance charges and interest. This means you’ll be paying more for your emergency than if you paid out-of-pocket with savings.
How Much Should You Have Saved?
If you’re starting from scratch, your tax refund will provide a good start. Last year, the IRS returned more than $355 billion in refunds, with the average refund totalling $2,775.
If you’re on course to getting something similar this year, your refund will start your savings on the right foot.
From there, you’ll want to make savings a part of your monthly budget until you save three to six months’ worth of living expenses set aside.
This may seem like a lot, but this large goal can help you when something major goes wrong. You can dip into this fund in case:
- You lose your job or have your shifts reduced
- You get so sick you can’t work
- A loved one requires support after they fall ill
- You need to take time off to act as a caregiver to elderly relatives or children
A substantial emergency fund gives you the luxury of time before you’re expected to get back to work, find another job, or qualify for benefits.
Should You Save Your Tax Refund Every Year?
Saving is great, but what if you’ve hit the six-month goal?
First of all, congratulations are in order. Saving that much money is no easy feat!
But more importantly, you’ve finally built your safety net. With that goal completed, you can turn your financial sights onto other important goals. Here are some examples:
- Pay down debts (lingering student loans, auto loans, cash advances, lines of credit, and credit cards)
- Invest in the future with your child’s college fund or your retirement
- Take on household maintenance or repairs that will increase the value of your home or reduce your energy consumption
Ultimately, it’s up to you how you spend your refund. After all, it’s your money.
And that brings up an important note at the end of all this. Your refund is your rightful earnings and not a surprise bonus. You only get a tax return if you skim too much tax off your income during the year—whether by accident or on purpose.
You can wait until you receive it in one lump sum during tax season. Or you can fold this money back into your usual paychecks by adjusting your W-2s and other tax forms. In either case, use it to your financial advantage before you splurge on something fun.