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. Early 2020 has shown many Americans that at any point, having money in savings to cover at least a month or two of living expenses is important.

Unfortunately, many people have no emergency fund. A recent survey from Bankrate revealed that only 40% of respondents could cover a $1,000 or more emergency expense with savings. Everyone else in need of emergency money would have to charge their bills to a credit card, take out a personal loan or find some other way to pay.

Hindsight is 20/20 — but 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. If you’re wondering how to build an emergency fund, why not start with your tax refund — as well as the CARES Act stimulus check heading your way.

Why save your tax refund this year?

With tax season extending to July 15 in 2020, you may want to consider throwing your refund into your emergency savings — then leaving it alone. The average federal tax refund in 2019 worked out to $2,869. And besides the refund, you’re probably due an economic stimulus payment of $1,200 from the CARES Act.

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 and stimulus check could leave you better off in 2020 and beyond.

Reduce money-related 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. Times like these are the worst time to try to find a fast loan. Finding money quickly may not come with the best terms — you may end up responsible for having to pay back more than you bargained for.

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,” Kirlew says.

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 or turn to an emergency loan.

Make a big impact 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.

Thinking about how to build an emergency fund can be overwhelming. 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.

This year is unique, since you may have an additional $1,200 in stimulus money from the government to put aside if you have no emergency fund. For someone who has struggled to build up emergency savings in the past, saving a tax refund or stimulus check in a separate savings account is a smart way to jumpstart a financial turnaround.

Improve your life in the long run

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.

“Yes, you may have a lot of fun going on a shopping spree with your tax refund,” Allec says. “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.”

A good choice to make is to save your tax refund in a high-yield savings account for the next time you need money now, 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 or an emergency funding loan, you’re saving big money by avoiding high-interest debt.

Currently, the average credit card APR is well over 17%. And emergency loans such as a payday loan can come with an interest rate of 300% or higher, making fast credit one of the most expensive borrowing options available when you need emergency money. A rainy day savings account can help you avoid this type of debt and all the interest payments that come with it.

How much should you save in your emergency fund

If you’re trying to figure out how to build an emergency savings fund, start by calculating your monthly expenses. Once you know how much money you need each month to cover all your bills, including rent, entertainment, loans and more, aim to save at least three to six months’ worth of monthly expenses. This should give you a good cushion while you get back on your feet.

Where to save your emergency fund

When considering where to deposit your emergency fund, the most important feature should be accessibility. In case of an emergency, you’ll want to withdraw funds immediately without having to worry about penalties or fees. Earning interest on your funds would be a great idea, but only if your money isn’t locked in for an extended period of time.

A high-yield account, regular savings or money market account would be the best place for your emergency funding. Avoid depositing the money into your checking account, where it may end up getting spent. And as for certificates of deposit (CDs), they’re not the best idea — you may earn a higher interest rate but you won’t be able to access your money until the term or agreement is over. Withdrawing your money sooner could cost you penalties.

When to use your emergency fund

Dip into your emergency fund when you need money now — and for a good reason. Ask yourself if the expense is a want or a need. Emergency funding should only be for necessities, such as a home repair, a medical expense or covering your mortgage or rent if you’re short. See yourself as a bank and don’t forget to pay yourself back, just as you would if you borrowed the money from a financial institution.

How to save money fast

If you have no emergency fund and you’re worried about what will happen if you need emergency money, you should prioritize a rainy day account. You’ve already learned that the best use of tax return funds is as savings. Here are some other ideas on how to build emergency fund fast:

  • Cut back on discretionary spending such as daily coffee shop visits, dining out and entertainment — and redirect your money to your savings
  • Work extra hours and set aside the money to grow your savings
  • Pick up a side hustle and put the money towards your emergency funding
  • Sell items from around the house you no longer need

The bottom line

Times are uncertain. The COVID-19 health crisis is affecting many Americans’ job security and the economy in general. Having no emergency fund can put you in a tricky situation. Don’t fall into the temptation of spending your tax return and deposit the money into your emergency savings fund instead. It’s the best way to jumpstart your emergency savings. And as financial coach Todd Tresidder of Financial Mentor so wisely puts it, “you don’t miss what you never had.”

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


Cynthia Paez Bowman

Contributing Writer

Cynthia Paez Bowman is a finance, real estate and international business journalist. Her work has been featured in Business Jet Traveler, MSN,, and

She owns and operates a small digital marketing and public relations firm that works with select startups and women-owned businesses to provide growth and visibility. Cynthia splits her time between Los Angeles, California, and San Sebastian, Spain. She travels to Africa and the Middle East regularly to consult with women’s NGOs about small business development