Expecting at least something back from federal or state taxes this year? If so, it certainly can be tempting to use those refunds for a splurge. However, a tax refund can be used as a powerful tool to get your household budget and money management strategies back on track, and help to avoid shortcomings in the next 12 months.
One of the priority usages for a refund should be to apply it to any critical debt that you have already fallen behind on or are in danger of doing so in the coming months. This could be utility bills or a payday loan.
The good news is that according to a Bankrate.com poll, 30 percent of Americans already plan to pay down debt with their tax refund. The poll also reported that 26 percent will use the funds for necessities such as food or utility bills, indicating that there are still Americans who are having difficulty living paycheck to paycheck and are either racking up debt, foregoing necessities or falling behind on basic living expenses.
It is estimated that approximately 12 million Americans use payday loans to make every day ends meet, and the Center for Responsible Lending estimates $27 billion in annual payday loan volume. In a February 2013 report “How Borrowers Choose and Repay Payday Loans” by the Pew Charitable Trust, it was found that most payday loan borrowers are dealing with reoccurring cash shortfalls. This survey found that 58 percent of payday loan borrowers have trouble meeting their regular bills at least half the time, and that contrary to being intended for emergency expenses, the primary reason that borrowers use payday loans is to keep up with regular bills. Of online payday loan borrowers, 73 percent indicated that their first payday loan was to meet a recurring expense, and 16 percent for emergency cash needs.
A tax refund can help a borrower satisfy a payday loan, and the Pew survey noted that one in six payday loan borrowers have used a tax refund to satisfy a payday loan.
Once payday loans are satisfied, also of priority are recurring expenses that may be already in arrears, or in danger in the coming months, such as a student or car loans, credit cards, furniture or electronics purchase or rentals, and store credit cards.
A prudent use of a tax refund is also to begin to build or re-build your emergency savings fund. It is generally suggested that three to six months living expenses is a fair amount to have as back-up funds. Get started, and you will be doing better than many Americans. In June 2012, Bankrate’s Financial Security Index indicated that 28 percent have no money saved for emergencies, and according to the newer Bankrate.com poll, only 28 percent say they will save or invest their tax refunds.
Keep your emergency fund in a safe and liquid account, not something risky. You need to know that this cash will be there when you need it and not suffer any losses.
Tax refund windfalls can be an opportunity for cash advance borrowers to clear out past debt and get a start on building up available cash that will enable them to reduce stress between paychecks in the coming year.
Bradley Hart is a communications manager for USA Payday, an online resource for consumers needing fast cash and cash advances to carry them over from paycheck to paycheck. Bradley is a frequent contributor to magazines and blogs in the area of financial services, consumer credit, and payday lending.. Comment on Bradley’s article at http://www.responsiblepaydaylending.com