To spend or to save? Strategies for using your tax refund or economic impact payment

Each year, approximately 75% of Americans receive a tax refund. According to the IRS, the average tax refund is around $3,000. As of March 12, the IRS has processed roughly 58.5 million tax returns, with the tax filing deadline extended from April 15 to May 17 to allow more flexibility for Americans impacted by the pandemic crisis.

Many Americans will likely use the extra influx of cash from tax refunds and economic impact payments to address the challenges brought forth by the COVID-19 pandemic. Although there are signs of economic improvement, more than half of working Americans still face the personal financial burdens of the outbreak. 

To spend or to save?

For some, the answer is straightforward. Tax refunds and economic impact payments will be necessary for basics like rent, groceries and other bills. Others who don’t require the money for extraordinary circumstances may be looking for ways to achieve their financial goals. Either way, the recent pandemic emphasizes the importance of working with a financial professional who can help you assess your unique situation and build a plan so you can be confident in your financial future. Ken Fellman, SVP, Consumer Banking Manager, shares a few strategies to consider.

Assess Your Personal Situation

The most important step is to take an honest look at your financial situation. Where are your funds needed the most right now? To determine this answer, you must understand your immediate needs for daily living expenses, an emergency fund, and your short and long-term financial goals.

Prioritize Your Goals

1. Take Care of the Basics

Your first priority should be taking care of your day-to-day cash flow needs. Focus on your most essential bills like mortgage/rent, electricity and other utilities. Creating or reevaluating your budget is an effective way to assess needs versus wants. You may need to make the tough decision to cancel certain services or subscriptions that do not fit in the adjusted budget.

2. Create or Build Your Emergency Fund

After accounting for your day-to-day cash flow needs, it’s critical to set up an emergency fund to cover the cost of unexpected home repairs, medical bills or lost income. According to a recent Bankrate Survey, 4 out of 10 Americans would need to borrow money for a $1,000 emergency expense. Maintaining at least three to six months of living expenses can provide a cushion for unforeseen circumstances and puts you in a better position to avoid taking on debt.

3. Short-term Savings Goals

After you have established an emergency fund, your next priority will likely be short-term savings goals. Are you saving for a new car or a new home? Consider setting up a separate savings account to jumpstart your funds for these near term purchases. Utilize separate savings accounts to avoid temptations to spend this money. Other common savings vehicles may include:

• 529 plan – A 529 plan is designed to encourage saving for future college expenses. Our advisors can help you determine the best strategy for funding your children’s education, depending on your financial circumstance and the type of school or training your child desires.
• Health Savings Account (HSA) - An HSA can help you save money to pay for qualified medical expenses. Withdrawals used to pay for these qualified expenses are tax-free.
• Certificates of Deposit (CD) - A CD has a higher interest rate than a traditional savings account and is protected by the FDIC, making your money a low-risk investment.

Tackle Your Debt

If you have covered the basics, established your emergency fund and addressed your short-term savings goals, it’s important to focus on your long-term goals. The additional cash from a tax refund or economic impact payment could be used to pay off debt.

Consider paying off debt with the highest interest rate first. According to debt.org, for those under the age of 35, the two most common types of debt are credit cards and student loans. Although you have the option to suspend your federal student loan payment until September 30, 2021, continuing with these payments may be a unique opportunity for those who have the financial resources. Since no interest is accruing on federal student loans, putting money toward the principal balance will allow you to pay down the loan faster and save more money in the long run.

Investing & Retirement

Investing is another opportunity to strengthen your financial future. Are you currently saving for retirement? If you do not already contribute to a 401(k), now may be a great time to start, especially if your employer offers a match. Remember, money in a 401(k) is a long-term saving strategy and there can be penalties for withdrawing money prematurely. If you have questions about investing and retirement savings, contact one of our financial advisors to discuss your opportunities.

Other Considerations

Donating to charity: Many nonprofit organizations continue to raise funds to assist community members with basic needs such as food and housing. If you are in a strong financial position, your donation could make a great impact on those who are experiencing ongoing challenges.

Supporting a local business: Many businesses have faced a year of limited operations and capacity restrictions. As local businesses navigate how to safely reopen and expand their services, you may choose to use part of your tax refund or economic impact payment to show your support.

Home renovations: Perhaps you’ve wanted to paint the dining room or install a new appliance. Using the extra cash to make a home improvement could increase the value of your home when you decide to sell.

Treat yourself: If you are financially secure, there is nothing wrong with splurging on a nice dinner, the latest home accessory or a new piece for your wardrobe. Just make sure you have first completed an honest assessment of your current financial picture.

Looking Ahead

Keep in mind the decisions you make today will have an impact on your financial future for years to come. The earlier you create and stick to a long-term plan, the greater flexibility you will have down the road.

Speak with a Financial Professional

Ultimately, how you choose to spend or save your money depends on your personal situation. An experienced financial advisor can help you assess your priorities and plan for your most important financial decisions – today and in the future.