Enough ink has been spilled about the permanence of death and taxes. Is it time to update the list of life’s certainties to include the need to save?
Done consistently, the habit of putting your tax refund into savings each year could well be the first step toward solving a long-standing American problem.
Last year, only 19% of Americans contributed to their savings, and 1 in 5 reported having no savings at all. Illinois, however, may be in a better place to save more. A recent comparison of U.S. Bureau of Economic Analysis data showed that it is among the top 15 states where consumers are likely to have more disposable income to save each month.
With tax-filing season here, a tax refund can be an effective way to prioritize saving money or simply to begin saving.
IRS data from last year shows that federal tax refund amounts for Illinois taxpayers were among the top five largest across states, and as of March 1, the national average refund amount was up 4.3% from last year, at $3,213. That’s money going back to about 75% of taxpayers.
Save, spend or splurge?
So how do you know if you should save your tax refund, spend it or splurge? Here are a few things to consider as you decide what’s best for you.
- Look at outstanding debt: Not all debt is bad. For instance, if you have a car payment at a locked moderate or low-interest rate, it might not make sense to make an extra payment or pay it off entirely. Other variable-rate debt can creep up on you and slowly multiply, such as revolving balances on credit cards with high interest rates. If you have growing debt, it may make sense for you to pay off as much as you can using your tax refund.
- Pad your emergency fund: A good rule of thumb is to keep three to six months of living expenses in your emergency fund. Start with your daily checking account and build up a buffer. Once you’ve reached your comfort level of at least three months of emergency or buffer savings, consider other higher-yield, lower-liquidity products. Make a plan to replenish any funds you’ve used, even if it’s slowly over time. If you don’t have an emergency fund, consider using your tax refund to start one. It’s never too late to start saving.
- Make your money grow: If you’ve looked at your debt and feel good about what you’ve set aside for emergencies, consider putting any remaining cash into an interest-bearing savings product, such as a certificate of deposit or money market account. These types of accounts are offering some of the highest rates of return (annual percentage yields) we’ve seen in decades and can help lump sums of all sizes grow. This can also be an effective strategy to save toward upcoming life moments like buying a car, a special vacation or paying for a wedding.
For many Americans, a tax refund is the largest check they will see all year. And for others who are more fortunate, a tax refund can be a small windfall. If you don’t need your tax refund for your day-to-day living expenses, consider making the savings of a tax refund an annual ritual, or use it as the kick-start, the one catalyst, that can help you become more financially secure.
There is no time like the present to get started and make savings as certain as death or taxes.
Arijit Roy is the head of consumer segment & solutions at U.S. Bank and is based in Chicago. He is also a current board member of the Consumer Bankers Association.
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