Use Your Tax Refund to Kick-Start an Emergency Fund

By Ayesha Haider, BA, MBA, AFC© Candidate, FINRA Military Spouse Fellow

For most of us, receiving a tax refund is a welcome break from our monthly routine of managing expenses to make ends meet. While it is very tempting to cash in your return and spend it on everyday items, the tax refund can also be a great way to motivate yourself to start an emergency fund.


As members of the military, we are less exposed to the risk of job loss than our civilian counterparts. However, it is still very important to have money set aside for any unplanned and expensive emergencies that might occur. Some examples of unplanned emergencies include broken appliances, medical emergencies, and auto repairs. For homeowners, having a well-stocked emergency fund can also help cushion your budget from any major increases in your escrow account obligations, which may result in a higher monthly mortgage payment.

The more fiscally responsible readers of this blog may argue that they would rather use the refund to pay off debt. However, in the absence of an emergency fund, something as simple as replacing a tire or brakes may cost hundreds of dollars and require you to take on additional debt burden either by paying through your credit card or taking out a short-term loan.


Here are some steps to setting up an emergency fund:


How much should I set aside?
It is recommended that you have an emergency fund that covers at least 3-6 months of your living expenses. Some practitioners recommend having a minimum savings buffer of at least $500-$800. For further guidance, check out this emergency fund calculator.


Where should I put it?
It is recommended that you set up an emergency fund in an account separate from the one you use for daily expenses. Whichever bank or credit union you choose to go with, make sure that you are able to withdraw money from your emergency account at short notice. You may want to consider putting your emergency funds in a money market account, which offers a higher interest rate than a traditional savings account.


What about the long term?
A tax refund is a great way to give your emergency fund that initial boost, but you may need to make more contributions to reach your desired savings goal. Moneycrashers.com offers some practical tips for effectively building and maintaining your emergency fund.


Use your next tax refund to set up a cash cushion that is accessible during emergencies. In addition to making you and your family more financially secure, you will be able to sleep easier knowing you’re prepared for any emergencies that may occur in the future.    

Tip of the Day

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