Americans plan to boost savings with tax refunds

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Eighty percent of Americans expecting a tax refund this year plan to save 25 percent or more, according to a new SunTrust Banks, Inc. (NYSE: STI) survey. Other plans for tax refunds include paying down debt (35 percent), travel/entertainment (22 percent), retail purchases (18 percent) and home improvement (13 percent).

“This may be the year consumers give themselves breathing room by building up their short-term savings,” said Brian Nelson Ford, financial well-being executive at SunTrust. “We know from previous research that about half of Americans don’t have $2,000 on hand to cover an emergency. It’s a great time to break that statistic, reduce the stress of living paycheck-to-paycheck and build financial confidence.”

According to IRS data, Americans qualifying for refunds received an average of $2,763 last year, an increase of roughly two percent over the previous year. To best manage a cash windfall, SunTrust suggests the following:

  1. Use the 50/30/20 formula. This year, consider applying 50 percent of a tax refund or bonus to savings; 30 percent to pay down debt; and 20 percent to spend. With some balance, there is nothing wrong with spending a little on you.
  2. Don’t spend the money before it arrives. Whether you’re looking forward to a tax refund or bonus, wait until the money is in your account before using the funds. You are more likely to make a smarter decision if the money is in your possession.
  3. Transfer your refund into a savings account. If your refund was deposited electronically into a checking account, don’t let it sit there while you decide how to use it. Transfer the money to a savings account to earn higher interest – or even a six-month certificate of deposit (CD) – until you know how to divide it across saving, debt reduction and spending.
  4. Ask for advice. You may be a do-it-yourself type, but sometimes it’s better to get an outsider’s perspective. Set up a meeting with a personal banker who can help you decide whether it’s better to save, invest or pay down debt – or all three.
  5. Anticipate future expenses. Recognize that next year will likely bring unexpected expenses that you won’t be able to meet with your normal cash flow. 

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