Use Your Tax Refund To Build An Emergency Fund

Filing your taxes may not be your favorite to-do, but getting money back sure makes it worth the effort. It’s also a great chance to build an emergency fund so you’re prepared for an unexpected medical, car, or home repair bill.

What is an emergency fund? It’s money you’ve saved up that enables you to take care of unexpected expenses without getting off track financially. Sometimes called a rainy day fund, it’s money you can use for life’s big curveballs, like a job loss or perhaps a medical emergency that leaves you unable to work.

The beauty of an emergency fund is that you can use this money instead of using a credit card or delaying a bill and incurring a late fee. Experts say that simply having some savings on hand, as little as $250 to $749, can prevent a setback from becoming a disaster. 

A tax refund is probably one of the only times a year that you receive such a large chunk of cash — cash you can use to create peace of mind by creating an emergency fund.

That said, how much you get back depends on a number of factors, including your filing status, number of dependents, and current tax law. The average federal tax refund in 2023 was just under $3,000.

How to get started
Experts recommend making sure your rainy day fund covers at least three months’ worth of income or expenses, like your housing, food, and transportation. Keep the fund in an account that’s liquid — one you can access without having to pay extra penalties or fees. 

To avoid temptation to dip into your fund, consider keeping it in a separate checking or savings account that you promise yourself not to touch unless there you need to pay an emergency expense.

What about paying down debt?
If you’re wondering if you should use the refund to pay down your high-interest debt instead, consider putting half in your emergency fund and half towards your credit card or student loan debt. 

Lowering the amount you owe each month will not only lower your payments, it can help you continue building your emergency fund. Sock away the payment difference into your emergency fund every month and watch the savings grow.
Finally, if you need help filing your taxes,  It’s good to know that AARP Foundation Tax-Aide offers tax prep help that can help you claim the deductions and credits you’re entitled to — for free. So you’ll get the biggest refund possible to build or grow your emergency fund.