Expecting a Tax Refund? Use These Tips to Grow Your Rainy Day Fund
Expecting a tax refund? With tax season quickly approaching, now is the perfect time to consider starting or adding to your rainy day fund. A rainy day fund is a safeguard you hope you'll never have to use. But having one can bring great peace of mind and financial stability should the unexpected happen, like temporary unemployment.
Just how much should you squirrel away? Calculate your expenses using a budget calculator to determine the amount of money you'll need should you face unemployment or unexpected expenses. A good rule of thumb is to save the equivalent of six months of living expenses.
Here are five tips to get you started.
1. Open a New Account
Separating emergency cash from other savings can help you monitor your progress and establish in your mind that this money has a special purpose. Money market savings accounts are a great place to stash your cash since they're low risk and earn interest but don't present big barriers to accessing your funds.
Keep in mind that while accessibility is important in an emergency, it becomes a disadvantage if temptation to use the money for other purposes kicks in. Consider ways to make it a bit harder to withdraw your money, like not linking an ATM card to the account. Also, pay attention to an account's minimum balance requirements to avoid paying maintenance fees.
2. Make It Easy to Add Funds
Depositing money into your emergency account can be easy to do, but just as easy to put off. Set up automated transfers from your checking account to your rainy day fund. This will keep you on track with minimal effort. And, if you're expecting to get some returns during tax season, add your tax refund to your account for additional emergency funds.
3. Embrace Direct Deposits
Another way to easily divert money to your safety net is to have your employer directly deposit a portion of your paycheck into the emergency account each pay period. You can also request for the IRS to make a direct deposit into your designated account with all or part of your tax refund.
4. Grow Money Gradually
Funding an account designed to improve your financial wellness shouldn't involve making savings contributions that earn less interest than paying down a higher interest rate debt. Depositing small amounts may be your best option if you're paying down high-interest debts, for example. Once you've reduced your debt load, keep up your good efforts by increasing your contributions. Setting small milestones – like accruing increments of $500 in savings – can help you build momentum and create a sense of achievement more quickly.
5. Evaluate Spending Reductions
Since every little bit of cash you put into a rainy day fund can be valuable, study your budget to find areas where you can reduce spending. Perhaps you can save some money by switching to a different cell phone plan or dropping a subscription service you rarely use. During tax season it might feel great to treat yourself using your refund, but putting that extra money into your savings can set you up for unexpected expenses that could set you back significantly.
Ultimately, building a reserve to help you cover your expenses takes discipline. It's an effort you'll be glad you made if you ever face the storm clouds of an unexpected financial need.