There's a good chance you'll get a refund on your taxes this year. In any given year, nearly 70% of Americans receive a refund from the IRS. The average refund was more than $2,890 in 2018.
The big question becomes, "What should I do with my refund?" This morning on my drive to work, one radio commercial tried to convince me to take mine and head to the dealership. Apparently, I need a 2019 Chevy Silverado.
Get behind me, Satan.
'Tis the season for companies telling you what to do with your tax refund. It's funny how it always seems to end up not in your bank account, but in theirs.
I get it. I feel the tug, too. A new car would boost your morale. That vacation to Italy would recharge your emotional battery. The 90s called and it wants its kitchen back. The temptations are endless.
But there's a better way. The good news is that you get to tell your refund what to do and where to go. Here's my recommendation: take that check---what could amount to essentially an extra paycheck---and deposit that cash right into a savings account and never look back.
Here's the hard truth that no dealership or interior designer or travel agent will tell you: you're going to need that cash for something this year. Someone will get sick or break an arm. The AC will die in mid-July. Your car's EGR valve will stop doing its job. In other words, a financial emergency will happen. Not this year? Then next year. Or the next.
Ever heard of Murphy's law? Something will go wrong. Do you have the cash to cover it?
A 2018 poll showed that only 39% of Americans have enough savings to cover a $1000 emergency. Another poll from 2017 revealed 57% of Americans couldn't pay cash for a $500 unexpected expense. It doesn't take much to get to those dollar thresholds. (In case you're wondering, that EGR valve will run you between $200-500 at your local mechanic.)
The first step to financial health is to build an emergency fund for when "life" happens. Start by getting $1,000 in there. Even better if it's your full tax refund. What if you have debt? Put $1,000 in that emergency fund and, if there's still some refund left, put it toward debt. Life doesn't care if you have debt or not. It is going to happen. And you'll need the cash to cover it.
Rehab Tip: Electronic filing with the IRS makes saving your refund easy. You can choose to receive your refund via direct deposit---right into your savings! Plus, when you choose direct deposit, you get your money much faster.