How to make your tax refund or pay raise work for you

Did you come into a tax refund this spring? Or maybe you recently got a bump in pay at work? Whenever you come into a little extra money, it can be tempting to splurge on something fun. After all, you deserve it, right? Financial experts, however, say that extra money should really go toward something that will reap benefits for the long-term, like building an emergency savings fund to help prevent future financial trouble.

Strengthen your emergency savings

“First things first,” says Stacey Black, BECU’s financial educator, “Make sure you tend to your emergency savings fund before opting for a new pair of shoes or a car down payment. If not, an unforeseen bill or financial setback could welcome a lot more trouble than you expected.” Nearly half of Americans said they couldn’t come up with $400 to cover an emergency expense without borrowing or selling something, according to a 2016 survey by the Federal Reserve Board.

Black suggests that you separate your emergency funds into multiple savings accounts for different unforeseen expenses. A few years ago, for example, she discovered just how important it was to have a savings account primarily for medical needs. “I have been contributing to it ever since,” Black says. “My primary goal is to save enough to cover my out-of-pocket expenses. For example, if my medical out-of-pocket maximum is $4,000, then I would set aside money each month until I have saved $4,000. This way I know I’m covered for a medical emergency and do not have to dip into other funds, like my credit card.”

Savings accounts like these can help make sure you don’t fall down the slippery slope of receiving a bill you can’t pay. After all, one in four Americans admit they do not pay their bills on time and nearly one in 10 had debts in collection as of 2018, according to NFCC’s 2018 consumer financial literacy survey, sponsored by BECU.

Pay off debt

If your emergency fund is already healthy enough to cover three to six months of expenses, then consider putting that extra money toward paying off debt, especially if it’s toward a high-interest credit card or loans with steep minimum monthly payments.

If you have debt you are tackling, you are not alone. By the end of 2018, the Federal Reserve revealed that credit card debt in the U.S. had reached a record high, $870 billion, the most in history. Credit cards have become the fourth-largest portion of consumer debt in the country as well, after mortgage, student loan and auto debt – and it can get out of control quickly.

Black says allocating extra funds toward your debt payments is a win-win. “By making a large principal payment on an auto loan, student loan or credit card, you can decrease both the amount of interest you owe and length of time needed to pay off that loan,” she explains.

After you’ve paid off one loan, Black then suggests rolling over what you were paying to the next loan you want to pay off, helping you tackle your debt even quicker. “If you need help identifying different ways to pay off your debt, consider exploring debt pay-off options with BECU’s Debt Pay-Off Calculator,” she says.

Plan for the future

While using your tax refund to splurge would provide immediate satisfaction, putting that money toward your retirement savings would be a gift with a much longer shelf life. After all, the majority of Americans tend to be behind in saving for retirement. To help prepare for your Golden Years, Black suggests increasing your financial contributions to your company’s 401(k) Plan, or taking the step to enroll in a 401(k) Plan if you aren’t yet, especially if your employer matches a portion of your contributions. “Your future self will thank you,” she says.

Do you have another big item that you are saving for in the future, like a down payment for a house or perhaps a wedding? Consider opening a strategic savings account with a higher rate of return. For example, a Money Market account has no monthly fees or minimum balance requirements, and a Certificate of Deposit, or CD, has specific fixed terms and interest rates. “If you’re interested in opening a CD, I would consider looking into a CD ladder,” Black explains. “Once a series of CDs are opened in a ladder format, it allows you to take advantage of the higher interest rates of longer-term CDs while still having the option to access your funds without facing penalties.”

Spread the wealth

If you’re feeling secure in your savings, debt payments and retirement funds, why not decide to use that extra money to give back? Nonprofits are always looking for donations of all sizes and giving back can be a great way to support something you’re passionate about or feel more involved in your local community. “Plus, you can also maximize your donation by asking your employer if they match charitable contributions made by employees,” says Black.

As a member-owned credit union, BECU is focused on helping increase the financial health of its members and communities through better rates, fewer fees, community partnerships and financial education.