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Getting a refund? Read on to see if the best place for it is none other than the bank.
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Just because you’re filing a tax return doesn’t mean you’re guaranteed to get a refund. And this year, tax refunds are likely to be lower across the board since the pandemic-era benefits that were in place for the 2021 tax year did not get extended to 2022.
But if you recently completed your tax return and are anticipating a refund, you might already be making plans for that money. And those plans could include a vacation, some upgraded electronics, or even a series of fun nights out.
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It’s easy to see why you might be tempted to spend your tax refund on something enjoyable. But you may want to consider putting your refund into a savings account instead.
Use your refund to better your financial situation
A recent survey by Empower Annuity Insurance Company of America found that 36% of people who are getting a refund plan to save that money. And if you don’t have a complete emergency fund, then it pays to stick your cash in the bank, too.
Of course, this assumes you don’t have overdue bills you’ve been counting on your refund to pay. If that’s the case, you might need to use your tax refund to get current on your utility bills, or to catch up on a missed car payment. But if you’re up to date on your bills and that money really is extra, then it pays to assess your emergency fund and see if it needs work.
Your emergency fund should have enough money to cover a minimum of three months of essential bills. The logic there is that if you were to lose your job, you might need that cash to cover your expenses while you look for work. So if you currently spend $2,500 a month on essential expenses and you only have $4,000 in savings, you may want to use your tax refund to boost your emergency cash reserves.
Other good uses for your tax refund
Maybe you already have a fully loaded emergency fund, you’re debt-free, and you’re current on bills. In that case, is your tax refund yours to spend freely?
Not necessarily. There may be other ways your tax refund can help address a financial need.
Imagine there’s a home repair you’ve been putting off for months due to not wanting to dip into your savings. You might be able to use your tax refund to address that issue so it doesn’t get worse.
Also, while you might have plenty of money in the bank for emergencies, if you’ve yet to start building retirement savings, your tax refund could serve as seed money for your IRA account. Or, you might be able to use that money to start saving for your kids’ higher education.
If you’re really meeting all of your financial goals, then sure, go ahead and spend your tax refund, whether it’s for a weekend getaway with your partner or a new TV. But before you spend your refund, think about the different ways it might help your financial picture improve on a whole.
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