Most people could do with more savings right about now. Luckily, tax season arrives just in time.
For plenty of taxpayers, filing a return means a refund is on its way soon. Averaging a couple of thousand dollars, a refund can be a considerable boon to many budgets. While some might use this windfall to splurge on something fun, there’s a better option: sock it away in an emergency fund.
Your Emergency Fund is a Critical Safety Net
An emergency fund is your backup when your budget fails to anticipate your costs.
Don’t get caught up on the “f” word. Budgetary failure happens to everyone occasionally; you don’t even have to be bad at managing your money to fail. Life can throw unpredictable and unlikely expenses that aren’t the usual bills in your budget. It’s only natural to overlook them from time to time.
Let’s say you slip on ice and lose a few teeth on the way down. Not many people can predict that, nor is an emergency dentist, specifically, something you have to budget for every month.
If you don’t have dental coverage as part of your health insurance, your emergency fund is a way to pay for urgent care. An emergency fund is a catch-all for all the bad luck you encounter in life.
Without these savings, you might have to borrow money online. If you already know how online borrowing works, you can skip this part. But if you don’t, it’s simple. An online lender makes it easy to review online loans before you borrow, so you know what you’re getting into.
If you like what you see, you can apply right there on the lender’s website using the virtual application form that’s available 24/7. Once you complete the approval process successfully, you can receive an online loan that fills in for your emergency fund.
What Do You Need in Savings to Feel Safe?
Personal finances are just that — personal! What one person needs in savings might be different from another. That said, a general rule of thumb is to have three to six months of living expenses set aside for the unknown.
This whopping goal is easier to achieve when you sink large windfalls like your refund into your savings. Last year, the Canada Revenue Agency issued the average Canadian a refund of $2,086, while Americans received almost $3,200 on average.
Do You Need to Save Your Tax Refund Every Year?
Saving your refund is a good idea if your emergency fund is low. But what if you already have a chunk of change set aside for emergencies?
If you’re nearing your three-to-six-month goal, don’t go on a shopping spree just yet. You can use your refund to shore up other areas of your finances.
Here are some ideas:
- Set it aside in a sinking fund to make an essential purchase you’ve been putting off.
- Put your refund towards online loan, credit card, or line of credit debt.
- Invest your refund in your home, completing maintenance or repairs that increase its value.
- Use your refund to jumpstart another goal, like saving for a down payment or your retirement.
Ultimately, your refund is your money, so you get to decide how you want to use it — even if it’s on something fun. But if you’ve recently tapped your emergency fund, pouring your refund into savings can help top up this account.