If you’re relying on your tax refund to do something other than save or pay off a debt (that’s up-to-date in payments), chances are your financial relief may be a temporary one.
While a refund may feel like an opportunity to go out and splurge, it could also be an opportunity to jumpstart a year of financial stability. In 2014, most taxpayers used their refund to pay off bills and make big-ticket purchases such as buying a car or paying for a vacation, according to CNN
. Very few refund recipients used their money to increase their savings. But, saving your refund could prevent a lack of finances while on vacation or struggling to pay off that new car note when “Refund Rich” season is over.
Let’s do things a little differently this year.
1. The S Word
A refund is great. But, it’s nothing in comparison to having an emergency savings account to draw from throughout the year (instead of waiting for tax season again). Many people who begin saving with a small amount of money become discouraged at the slow growth rate of their savings account. Using your refund to jumpstart your savings is a great way to stay motivated and watch your money grow.
Though your ideal savings rate depends on your specific needs, Paula Pant, a personal finance journalist and creator of the blog Afford Anything, suggests putting 20 percent of your monthly income toward savings. According to the Victoria Advocate
, financial advisers at Sather Financial Group recommend having, at least, six to nine months worth of living expenses saved for emergencies. They highly suggest saving your refund, if you don’t have emergency savings already.
One way to think of it is you’ve already gone one year without being able to spend your refund. So, if you don’t have a current financial emergency, what’s one more?
If you’re not in the position to start a savings account, save on purchasing. Subscribe to newsletters from retailers who offer exclusive coupons to their email subscribers. Find out if your health insurance plan offers discounts on gym memberships. Learn when your favorite airline or hotel has the best deals. Shop the clearance rack or better yet, visit a resale shop. You can also purchase used or refurbished electronics. There are several websites, like LivingSocial.com and Groupon.com, that offer savings on restaurants, spa treatments, travel and adventure.
Join the conversation and share this story