With millions of Americans set to receive tax refunds this spring, SunTrust is offering some tips on how to best manage an expected cash windfall, like a tax refund.
According to a new SunTrust Banks survey, 25 percent of Americans who expect to receive a tax refund this year plan to make a major purchase before receiving the money. This percentage rises to 36 percent for millennials ages 18 to 34, and to 40 percent for Gen Xers ages 35 to 44.
“We know from previous research that 51 percent of Americans don’t have $2,000 on hand to cover an emergency. Tax refunds present a perfect time to quickly fund a confidence account that can be used for emergencies,” Brian Nelson Ford, financial well-being executive at SunTrust, said.
SunTrust also found that 60 percent of Americans expecting a tax refund this year plan to save at least half of it, signaling that saving is currently a key priority for many individuals.
“Saving part of your tax refund can give you peace of mind by helping to prepare you for either an unexpected expense or a positive opportunity,” Ford said. “Rewarding yourself is also a strategy to stay motivated, so consider putting a portion of your refund toward a splurge or something you need but have delayed buying.”
To best manage a cash windfall such as a tax refund, SunTrust recommends not spending the money before it arrives. Tax refunds can get delayed or lost in the mail, resulting in unnecessary credit card balances. People are more likely to make smarter decisions if the money is in hand.
They also suggest transferring the refund into a savings account while deciding how to use it. A savings account – or a six-month certificate of deposit — will typically earn higher interest.
A good idea is to save some or most of it for unanticipated, but inevitable, future expenses, like car repair or a new roof.
When in doubt, use the 50/20/30 formula, which uses 50 percent to pay down debt, 20 percent to save, and 30 percent to spend.
Another suggestion from SunTrust is to seek professional advice from a personal banker when in doubt of financial management practices.