For many Americans, tax season comes with a proverbial pot of gold at the end of the rainbow in the form of a tax refund, with said pot of gold containing hundreds or thousands of dollars. Expecting a windfall of cash from your tax refund? You may already be visualizing how you’ll use the money. We must admit that finally purchasing that thing you’ve had your eye on would be pretty sweet – whether it’s camping gear, front row tickets to your favorite artist’s concert, an RGB graphics card, or some other thing that brings you joy.
However – have you considered the power of saving that tax refund instead? About one-third of Americans saved theirs in 2023, according to CNBC. Over time, it can compound with no extra work required on your end.
Of course, there are lots of options when it comes to saving, spending, and investing your tax refund money, with different benefits and tradeoffs. Here, we’ll dig into why it’s a great idea to leverage a high yield savings account to stash away that bonus cash.
Get a More Predictable Return
Maximizing the potential of your tax refund doesn’t have to involve high-stakes investments. By opting for a safer route and stashing your tax refund in a high-yield savings account, you can secure a more predictable return on your money. Compared to a standard savings account, a high-yield savings account can help you earn more interest as well!
High yield savings accounts typically offer competitive interest rates, allowing your money to grow steadily over time. You can use an online APY calculator to project the interest you’ll get based on an account’s annual percentage yield, compounding period, the amount of money you deposit (such as the amount of your tax refund), and for how long you’ll have the money grow in the account. You can see how saving money and interest really compounds over time!
If the account’s APY ever increases or decreases, or you deposit more money into the account, you can easily re-calculate your projected interest income.
While the returns from a high yield savings account may not match the potentially high gains of riskier investments, the reliability and consistency of this approach can be invaluable – especially if your priorities are financial security and stability.
Plus, if you have your account at a member FDIC bank (which Milli is), your deposited funds are protected.
Build Strong Savings Habits
If you’re on a journey to save more money, or improve your ratio of savings to spending, now’s your chance to put that into practice. Another pro to saving your tax refund is simply getting in the habit of saving! Saving money involves a combination of having surplus money than you need, then choosing to set it aside and hang onto it for the future. It takes time and practice to combat the temptation of buying that item you’ve been eyeing, or the trending thing influencers are touting on social media. If you’ve got a windfall thanks to your tax refund and don’t need the money to make a purchase, take this opportunity to reinforce your savings habit!
When it comes to saving your tax refund, it’s also not an “all or nothing” situation. Even saving a portion is a win. Challenge yourself to save a higher percentage than last year (if that’s financially feasible for you). Of course, if something comes up and you find you need the money later, it’ll be there for you in your savings account. Think emergency fund (more to follow)!
You may find that getting started helps encourage healthy habits. Watch how the interest you earn grows your account balance, and you may start to feel some more motivation to keep up the saving. The tax refund is just the catalyst you need to get started or keep you going on your savings journey!
Bulk Up Your Emergency Fund
Leveraging your tax refund to bolster your emergency fund is a savvy financial move that can provide you with invaluable peace of mind. An emergency fund serves as a financial safety net, helping you make it through times of unexpected expenses or a drop in income. By allocating your tax refund towards this fund, you can build your financial resilience and reduce your need to rely on something like high-interest debt or pulling from your retirement to cover unexpected expenses.
You may already have an emergency fund, either fully funded to the recommended three to six months of expenses, or you’re working on getting there. No matter where you are, it’s important to recalibrate the amount in the fund to the expenses of your lifestyle, which may change over time. Plus, a recent period of higher-than-normal inflation in the United States in 2022 and 2023 has driven up the cost of living for most of us. The amount you saved in your rainy-day fund for a certain number of months of expenses may no longer go as far, especially if you haven’t topped it off lately.
Consistently contributing to your emergency fund, especially with a windfall like tax refunds, builds a buffer and addresses the realistic cost of unexpected expenses you may face.
Whether your tax refund is a few hundred or a few thousand dollars, stashing some or all of it in your emergency fund to build it up or top it off is a great move. By prioritizing the reinforcement of your emergency fund with your tax refund, you’re not just saving for a rainy day – you’re investing in your financial security and well-being.
What makes Milli a great spot to stash your emergency fund is not only our competitive APY, but also our Jars feature. You can create a Jar for an emergency fund as a whole, or special categories such as having your annual health insurance deductible saved, in case of a medical emergency. If you do ever need to spend the money in your emergency fund, you can instantly transfer it to the Spending Account and make a purchase with the Milli Visa ® Debit Card, or get cash from an Allpoint ATM. Other online banks with competitive HYSA interest rates may not offer a checking or spending feature, making it a little slower to access your money. Milli provides the customization and flexibility you need to support your lifestyle and needs!
Pre-Fund Upcoming Purchases
We’ve talked about saving your tax refund, so now let’s hone in on one subset of saving: saving for a specific purchase. After all, we save money for many reasons – one of which can be to have the cash on hand to buy something in the future. Using your tax refund to pre-fund upcoming purchases is a strategic financial move. By allocating your tax refund towards these planned expenses, which may be a few months to a year away, you can mitigate the financial strain associated with such purchases.
You may get your tax refund in the spring, but if you have an upcoming purchase in the summer, fall, or winter, you can save the money for a few months and earn some interest on it in the meantime. Maybe you set aside the money for your planned family vacation in August, or holiday gifts that you’ll buy in December. Consumers report anticipating spending over $900 on Christmas gifts alone – having that cost covered in advance by setting aside a tax refund could help reduce some of the stress of the holiday season! Of course, you can save up for anything on your horizon – maybe home upgrades, a new computer, orthodontia, professionally dyeing your hair bright pink – it’s your money and your life! In addition, most financial advisors would never recommend investing short-term need money in the market – thus a great alternative being a high yield savings account like Milli.
An added bonus: pre-funding large expenses with your tax refund enables you to take advantage of potential discounts or negotiate better deals, as you have the flexibility to pay upfront or negotiate from a position of financial strength. If there is a genuine sale on the item, service, experience you plan to purchase, you could buy it early and it might cost less!
Even though you’ll ultimately be spending that tax refund, you’re still building discipline by saving up and delaying the gratification. Pre-funding future expenses can allow you to avoid reliance on loans and steering clear of interest charges. By proactively setting aside funds, you gain greater control over your finances and minimize the risk of overspending when the time comes to make the purchase.
Conclusion
Being intentional with your tax refund money is a great way to make progress toward your financial goals. You can help your tax refund go even further by saving it in a high yield savings account to grow your money over time. Use this opportunity to build or reinforce strong savings habits – your future self will thank you!
Looking for a place to save your tax refund with a highly competitive annual percentage yield? Check out Milli! We’re built to help you have more money for the things that matter most. Link your existing bank account and/or have the IRS direct deposit your tax refund into the account and get saving. Download Milli from the App Store or Google Play and sign up today.
Keep reading on the Milli blog:
How to Save $5,000 in One Year
How to Start Saving for Retirement
How Much Money Do Americans Have?
