Each year, the majority of taxpayers who file a return end up with a refund on their hands, and this season is shaping up to be no exception. If you're getting a tax refund, you may be tempted to spend that money on a big purchase, whether it's furniture, electronics, or even a much-wanted vacation. In fact, 21% of taxpayers who get a refund say they're planning to spend every penny of it, according to a recent survey by media and marketing company Valassis. But before you rush to use up your newfound cash, make sure you don't need the money for more important purposes -- namely, your emergency fund.
Could you cover a financial emergency?
You never know when something might go wrong in your life that costs you money. It could be your car refusing to start, your home's heating system breaking, or your health sending you into the ER with a whopping bill to follow. Or, you might find yourself out of a job out of the blue, even if your reputation at work is otherwise stellar.
That's why you must have emergency savings to protect yourself from life's unknowns. Without money in the bank, you risk racking up debt the moment an unplanned bill lands in your lap that your paychecks can't cover.
Unfortunately, a large number of Americans are woefully unprepared for a financial emergency. In a study by the Federal Reserve Board last year, 40% of U.S. adults said they didn't have the money on hand to cover a mere $400 emergency. Rather, they'd need to borrow the money in some shape or form, sell belongings, or do something similarly creative to cover that sort of bill. If you're in a similar boat, then you'd better think twice before spending your entire tax refund -- because the one thing you should be doing with that money is sticking it in the bank.
How much emergency savings should you aim for? Ideally, enough to cover anywhere from three to six months' worth of essential living expenses. Now chances are, your tax refund won't suffice in constituting a full emergency fund unless it's truly substantial. But a $2,000 or $3,000 refund could be a solid starting point.
Your tax refund isn't free money
If you're still not motivated to save your tax refund rather than spend it, remember this: That money isn't a gift from the IRS. Rather, it's cash you were supposed to collect in your paychecks during the year but didn't.
Furthermore, if not having access to that money during the year caused you to rack up debt at any point, then you absolutely must stick your refund directly into the bank. That way, if a repeat scenario creeps up, you won't face a similar fate.
Of course, if your savings are in a healthy place, then you should feel free to spend your tax refund as you choose, whether it's on a gadget, a weekend getaway, or something similarly indulgent that makes you happy. But if that's not the case, then failing to sock that money away could be a move you'll ultimately regret in a very big way.