Yahoo Finance 3 Reasons Why You Need to Save Your Tax Refund
It's tax time. For many Americans, this also means that it's tax refund time. According to the Internal Revenue Service, the average refund is $3,071, and although it's tempting to take that cash and treat yourself, you probably know the best financial course of action is to save that money for a rainy day. Here are three reasons to put that money in a savings account or use it to pay down debt or invest.
[See: Answers to 7 Burning Tax Questions.]
1. You can use it to cover a variety of emergencies. One of your first financial goals should be to establish a savings account to cover unexpected expenses. These might include a major car or home repair, a visit to the emergency room or a period of unemployment. Experts recommend that you save enough cash to cover three to six months of expenses.
If three to six months sound intimidating -- it's a lot of money -- start by putting something, anything, in your savings. According to a new NerdWallet study, Americans are currently saving an average of $2,540 per year, which might cover one emergency but certainly not two and probably wouldn't be sufficient if you were laid off for multiple weeks.
By saving your tax refund, you're supercharging your ability to cover emergencies without going into debt. Not only will this save you interest, it will also save you stress.
[See: 7 Most-Missed Tax Deductions and Credits.]
2. You'll earn additional interest this year, and maybe more later. Interest rates are at historic lows, so the interest to be gained by saving your tax refund is not that significant. The average tax refund saved in a high-yield account earning 1.1 percent interest, among the highest available, would accrue only $34 in interest per year. But interest rates won't always be so low.
The federal funds rate has started slowly increasing, and experts say it will eventually affect the interest offered on deposit accounts. As banks are able to demand more interest for debt products, they will want more money to lend. Therefore, they'll increase the interest rates on their savings accounts to encourage consumers to save more.
Switch to a high-yield savings account before these increases happen to take advantage of all available gains. Accounts with the highest interest rates now will likely continue to have the highest interest when rate hikes occur.
[See: 10 Smart Ways to Spend Your Tax Refund.]
3. You'll avoid buyer's remorse. Some Americans may need their tax refunds to catch up on late bills or put food on the table. If you don't need your refund for essentials, however, it's a good idea to put it in savings. Otherwise, you might do some impulse shopping and regret it later. You've likely heard of buyer's remorse.
If you aren't going to save all $3,000-plus of your tax refund, save part of it. Whether it's 10 percent or 80 percent, putting something away to help you cover inevitable unexpected expenses is beneficial for a healthy financial life.
If you already have an emergency fund established, there are other ways to use your refund to improve your finances. The average American household with credit card debt carries a balance of almost $7,000 from month to month. Credit card debt is one of the most expensive types of debt, and you should aim to pay it down as quickly as possible, as well as any other high-interest debt you have.
Investing is another good option for your tax refund. Max out your contributions to a traditional or Roth individual retirement account. Already doing that? Buy taxable index funds to grow your overall wealth.
You may also decide to invest in yourself. This might mean buying online courses or books that will further your career, going back to school for an advanced degree or putting money into your current or future business. Get creative, but direct your dollars where they will benefit you most.
A tax refund may seem like found money, but it's money you earned. Treat it accordingly and try to put it -- or at least most of it -- toward improving your financial life: save, pay off debt or invest.
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