No Emergency Fund? Start With Your Tax Refund

Life is full of surprises — some good and some bad. Most of us just try to ride the wave the best we can, making the most of what we have.

When it comes to our financial lives though, there are steps we can take to ensure life’s “surprises” don’t throw our lives into a tailspin. You can’t predict when your car will break down or you’ll face a medical emergency, but you can plan for those “what ifs” in a financial sense.

Unfortunately, not everyone who needs emergency savings has enough — or any at all. A recent survey from Bankrate revealed that only 40% of respondents could cover a $1,000+ emergency expense with savings. Everyone else would have to charge their emergency bills to a credit card, take out a personal loan, or find some other way to pay.

Four Reasons to Save Your Tax Refund This Year

With tax season wrapping up, you may want to consider throwing your refund into your emergency savings — then leaving it alone. The average federal tax refund in 2018 worked out to $2,899, while the average 2019 refund (for last year’s tax season) is still $1,949 so far this year.

That may not be enough to solve all your financial problems, but it’s a good start. Here are some of the ways saving your refund could leave you better off in 2019 and beyond.

You Can Reduce Money Stress

One of the worst consequences of not having any emergency savings is the money stress it adds to our lives. When you’re living paycheck-to-paycheck, even a minor hiccup like needing new tires or an emergency room co-pay can throw you off track. Then you’re left scrambling to figure out how to cover those surprise expenses while also keeping the lights on and food on the table.

Financial coach Anthony Kirlew of Fiscally Sound says that’s why he suggests his clients build up emergency savings in addition to paying down high-interest debt.

“It takes discipline to save money that you were not expecting to receive, but in the long run, saving your tax refund reduces your stress because it will help ensure that you have a financial cushion to cover an emergency without hurting your budget or racking up credit card debt,” he said.

Even if your tax refund is only $1,000, having that money set aside could help you sleep easier. And when the next random expense comes along, you won’t have to panic.

Make a Big Impact All at Once

Financial planner R.J. Weiss says one major concept in behavior science is the concept of willpower depletion — the idea that we have a limited amount of self-control which gets used the more decisions we make. In other words, making one good decision is easier than making multiple small decisions, he says.

Your tax refund is one of the few chances throughout the year where you can make one good decision with a sizeable initial impact. “Instead of saving, say, $200 a month for 12 months to build an emergency fund, which may require dozens of small decisions a month, you can simply save it all in one big chunk,” he says.

For someone who has struggled to build up emergency savings in the past, saving a tax refund in a separate savings account is a smart way to jumpstart a financial turnaround.

Improve Your Life in the Long-Term

CPA Logan Allec of Money Done Right says he has seen people make some big mistakes with their tax refunds during his career, from splurges on gadgets his clients don’t need to gambling it all away in Vegas!

For example, several years ago one of his clients used his refund to purchase a new PlayStation 4 and almost a dozen games. A few months later, the same client’s car broke down and he didn’t have an adequate emergency fund to cover the repair. Not surprisingly, he wound up charging the cost on his credit card.

“This sent him down a financial hole that took him years to recover from — and this recovery involved selling his beloved PlayStation 4 on Craigslist,” said Allec.

This just goes to show the importance of an emergency fund, and how wasting your tax refund could harm you in the short-term.

“Yes, you may have a lot of fun going on a shopping spree with your tax refund,” said Allec. “But sooner or later, some unforeseen expense is going to come up, and I guarantee that you will be kicking yourself for not having used that refund money to build your emergency fund.”

The bottom line: Save your tax refund in a high-yield savings account, and your future self will thank you.

Save Money Over the Long-Term

While you may not earn a ton of money in interest by stashing your tax refund in emergency savings, having the money to cover a pricey home repair or surprise medical bill could easily save you hundreds — or even thousands — of dollars over the long-term. When you cover emergency expenses with savings instead of a credit card, you’re saving big money by avoiding high-interest debt.

Currently, the average credit card APR is well over 17%, making credit cards one of the most expensive borrowing options available. Emergency savings can help you avoid this type of debt and all the interest payments that come with it.

The Bottom Line

Life is stressful enough without having some emergency savings set aside. You work hard all year long and you do the best you can, so you shouldn’t have to have your life turned upside down when an unanticipated bill is thrown your way.

Why is using your tax refund the perfect way to jumpstart your emergency savings? As financial coach Todd Tresidder of Financial Mentor so wisely puts it, “you don’t miss what you never had.”

Windfalls like a tax refund can easily be saved without any sense of deprivation. The money hasn’t been yours all along, so you may not even miss it.

Open a high-yield savings account or add your tax refund to the e-fund you already have. Then, no matter what you do, don’t look back.

You’ll never regret saving for life’s surprises, but you could very well regret it if you don’t.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.

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