Tax refunds are the single biggest cash infusion many households see all year — and it may be their best shot at getting their financial lives on track.
The average refund last year was $2,895, according to the IRS.
Researchers have identified several ways people can use their refunds to increase their stability. Here are four approaches to consider:
1. Have a plan. Decide exactly what to do with your refund before you get it. Researchers with the nonprofit Common Cents Labs found that planning ahead significantly boosted savings rates. People who were asked to save some of their refund before they prepared their taxes put aside 58 percent more than those who were asked to save the moment the money hit their bank accounts.
2. Pad your cushion. Even small amounts of savings can help people avoid payday loans and other high-cost borrowing. A $500 emergency fund is a good first goal. If you have that much saved, consider boosting your savings to $2,000. That’s the median cost of the largest financial shock faced by families studied by the Pew Charitable Trusts. Once you have that, you can aim for an emergency fund equal to one month’s expenses, then three months’ worth. If an unexpected expense wipes out your savings, that’s actually a good thing — the emergency fund did what it was supposed to do. Just focus on building up your fund again.
3. Strategize health care expenses. Spending at health care providers, particularly dentists, spikes after people get their tax refunds, according to a JPMorgan Chase Institute study released this year. If you have been putting off treatments, screenings or dental work, consider asking your health care provider to help you prioritize what’s most important and what you can let slide when money is tight. It’s worth asking about payment plans as well, but avoid putting medical expenses on credit cards unless you can pay off the balance quickly.
4. Negotiate a debt. Collection accounts show up on the credit reports of nearly one out of three Americans, according to the Consumer Financial Protection Bureau. If you have debts in collections, don’t assume you have to pay the full amount. Collection agencies are often willing to settle for 30 percent to 50 percent of what they say you owe. They may be especially motivated to settle during tax refund season, because they understand people have cash in hand. Settling debts can be tricky, though, so check out NerdWallet’s do-it-yourself guide.
Liz Weston is a columnist at NerdWallet. E-mail: firstname.lastname@example.org. Twitter: @lizweston