Today’s question is from Jessica:
Jesse,
We recently moved into a home that needs work, we also received money from our tax refund and do not want to blow through this. Where should we put our money that will draw interest and be able to access if needed? This is the first time we will actually be able to save our tax refund instead of using it on our home taxes as our mortgage now is all included. -Jessica
Hi Jessica, getting a tax refund always feels good. Like you said, it is important not to blow through it and later find you could have used it more wisely instead of buying that big new toy you’ve always dreamed about.
If I were in your shoes, I would make sure our emergency fund is built up to what we would need should all other sources of income shut off for six months, especially if you are looking at making some sizable repairs to your house in the future that could be a drain on any excess income you have coming in.
I have always used either a money market account at our local bank or an online account that ties to my local bank that I could easily get to if needed for emergency fund and other savings. The reason was solely for the ease of access.
I never really took the interest rate into account (except for the fact that it was higher than the usual savings account) because quick access to me outweighed the return I would get due to interest because the account was not set up for long-term use, other than the emergency fund.
Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the MoneySavingMom.com team! If you have a question you’d like him to answer in a future column, you can submit it here.
The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting, or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.
Jodi says
I am actually an accountant and I always try to tell people, rememeber this is your money the gov’t was holding onto for you for the year. Treat it like youbwould your money throughout the year. Great advice.
Abby @ Just a Girl and Her Blog says
Thanks for the tips, Jesse! It is so tempting to blow right through that refund, but I know we’ll thank ourselves later for putting it into savings. 🙂 Have a wonderful day!
~Abby =)
Lori says
I am surprised that you would say “getting a tax refund always feels good” Crystal. If you are getting a refund back,you are essentially giving the government your money. Think about it this way…you are giving them an interest free loan! Change your with holdings so you can receive a larger paycheck!
Crystal says
My husband wrote this, so I’ll let him speak to this. 🙂 But I *will* say that I’m pretty sure he’ll agree with you as far as not giving the government an interest-free loan, as this is something we often talk about. However, when it comes down to tax time, it’s always nice to get a refund versus having to pay a large amount of taxes. 🙂
Kalyn Brooke | Creative Savings says
To make it last even further, it’s always nice to get Lowes or Home Depot gift cards from swagbucks, ebates, and other reward programs!
Shannon says
Great advice Jesse! I look forward to your posts. So to confirm, you primarily use financial resources through your bank for savings, investing, etc.? We are planning on using our refund to invest and I am wondering if I should invest through the resources provided through my credit union since I don’t know how to determine credible sources for investing in particular.
Marianne says
Keeping an emergency fund in the bank is a good idea. Investing through your bank is typically not. For an investing newbie, I would recommend either speaking with a fee-based financial adviser (if you want some professional guidance) or starting out by investing in an index fund at Fidelity or Vanguard (if you want to teach yourself).
Jason Cabler (@DrCabler) says
I would agree with putting it toward an emergency fund. However, if you have a basic emergency fund in place, pay off all the debt you can with that money, then build a larger emergency fund later.
Debt always makes you poorer and drains money away. The less you have, the better off you are, period.
Melissa says
Right after I graduated college and money was very tight I often used my tax return money to pay for dental care, such as crowns or root canals that I needed or to pre-pay on my car insurance for the year. These days my husband and I put any tax return money that we get into our online savings account, although we’ve been attempting to adjust our withholdings so that we don’t get a large return.
Keren says
This is one time of year when I’m a little sad that our family is entirely self-employed–no tax refunds! 🙁
Marianne says
Why be sad? You are only giving the government exactly what you owe instead of loaning your money out and getting a zero return.
nicole says
In this economy, you should stockpile on groceries since inflation is hitting the groceries stores hard. Then put the rest into your emergency fund to help build that egg for 6 months!
Heart and Haven says
We are using our tax refund to pay down our mortgage. Paying down a loan that has an interest rate of 5.75% is better than any return I can get from a savings account!
mindy says
That’s right. A lot of people still confuse about tax deductible on the home mortgage and a tax credit. How much do you save on tax vs. how much you pay toward the interest of mortgage just to save some $$ on tax.
Susan says
If you are getting a sizeable tax refund, I’d suggest lowering your withholding. Instead of letting the IRS keep your money throughout the year, keep it for yourself. This way you can earn a little bit more interest, and the money will be available to you if you need it instead of having to wait for a tax refund.
Rebekah says
I agree – lower your withholdings so you don’t get a refund at all, but instead get it throughout the year. 🙂
Jenn says
Thanks for your input, Jesse! Reading this today made me realize that maybe we shouldn’t keep our (pretty sizable) emergency fund in a savings account anymore.
What is the average difference between interest rates of money market accounts and savings accounts? We’ve always used ING, becuase their rates are higher than others we’ve found, but this sounds like it’s maybe a better option? Thanks!
mindy says
I have ING account also but found that their 360 checking account rate is 0.80-0.85% which is higher than saving account (0.75%).
Jenn says
Thanks, Mindy! I just checked it out, and it looks like we don’t quite have enough in there yet to earn that rate, but if we get to that $ range, we’ll definitely make that switch:) I appreciate the tip!
Stephanie @ Housewife Mama says
Great advice! We just spent most of our last 2 years of tax returns on our first mini-van. It felt great to pay cash! We had it sitting in a savings account that we could easily access when a great on a van came up, so that made it easy and quick.