Money Management

Tax refunds really aren’t a good thing, although they may seem like it. 

During the 2022 tax-filing season, the average tax refund was $3,039, according to the IRS. The agency delivered a total of 96 million refunds collectively valued at more than $292 billion.

Many people await the direct deposit of this money into their bank accounts. I am not one of them. I have not received a tax refund for the vast majority of my working life and I will not receive a refund when I file my taxes in 2023 either. In fact, I will owe the IRS a little bit of money.

While having to pay a tax bill may not seem like the most fun thing to do with your hard-earned dollars, I am actually very happy to have an outstanding balance due. Here’s why.

Owing the IRS money means I kept my own cash in hand

The reason I am happy that I will owe the IRS money is simple. I’m pleased I didn’t overpay my taxes and end up giving the government my money to hold onto interest free for months at a time.

See, while a tax refund may feel like a windfall, it’s not. It’s the government giving your own money back to you — sometimes months later than you paid it in. If you loaned a friend thousands of dollars in January and they gave it back to you the following April without paying a dime of interest, you probably wouldn’t be celebrating. But that’s essentially what happens if you pay too much in taxes and get excited about a refund.

I not only don’t want to give the IRS an interest-free loan, but I also don’t want to have my money tied up during the year in case I need it. If I keep money in my savings account, I can access that money if I have an unexpected expense or if I want to pay extra on a credit card bill to avoid interest charges. I have all year to save up for my tax bill, and in the meantime, I can use the cash for anything I prefer.

If I’ve overpaid the IRS, though, then I have to wait to get my refund if I want to get that cash back — and that may happen months after I actually need the money.

You don’t have to get a big refund if you don’t want one

For me, it’s easy to control how much I pay on my taxes because I pay quarterly estimated payments since I don’t have a traditional employer who withholds money for my tax bill.

But, whether you work for yourself or a company, you don’t have to get a refund. You can just adjust the amount you pay in when you work independently or can adjust your withholding with your employer by completing a new W-4.

You want to make sure you don’t pay in too little and get hit with an underpayment penalty, but as long as you’re meeting the minimum requirements, you absolutely do not need to pay any extra that the IRS will have to refund you later.

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A lot of people may be ill-equipped to get through a period of unemployment. 

There’s a reason every consumer, regardless of income, should have an emergency fund. Without money in the bank, you might struggle if you lose your job and the paycheck that goes with it.

In fact, as a general rule, you should aim to have enough money in your savings account to cover at least three full months of essential bills. These include things like your mortgage payment or rent, food, and utilities.

The logic here is that if you lose your job — especially during an economic downturn — it might easily take you three months or longer to find work again. So you’ll want a way to cover your bills without falling behind or having to rely on credit cards or loans.

But according to recent data from YouGov, more than half of Americans have less than $5,000 in savings. And that means many people are not, in fact, equipped to cover three months of essential expenses.

Don’t leave yourself short

Even if you have a great career and a steady job, you never know when economic conditions might worsen. And if that were to happen, your risk of getting laid off could increase.

That’s why having an emergency fund with enough cash to cover three months of bills is crucial. But unless you live very frugally, it will probably take more than $5,000 to reach that threshold.

A 2022 research report by The Ascent found that the average American household spends $5,577 a month on living expenses. So if you have less than $5,000 in the bank, it means you may not have enough money on hand to pay for even a month of bills.

Now to be fair, when we break down that $5,577, we see that it doesn’t just include essential expenses. It also accounts for things like entertainment, which the typical consumer spends almost $300 on each month.

But even if we only account for the top five essential spending categories among U.S. households — housing, transportation, food, insurance, and healthcare — we see that the typical household spends about $4,600 on those key items alone. So either way, it’s fair to assume that having under $5,000 in savings means the typical consumer can’t cover three months of essential bills.

Prioritize your savings

Having some amount of money in savings is certainly better than having none at all. And to be clear, if you have, say, $3,000 in the bank, that’s certainly something to be proud of.

At the same time, it’s important to figure out how much money you spend on essentials each month and then work your hardest to sock away enough cash to cover that sum three times over. Perhaps you spend less than the typical American, so run your own numbers to establish your personal savings goal. And from there, do what you can to make building savings a priority.

You may need to cut back on leisure spending for a while to make faster progress on your savings. You may even need to make sacrifices like getting a roommate or not going on vacation. But if you land in a scenario where your job goes away and you need a financial lifeline, you’ll be thankful for having built one.

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It’s definitely not something you should test out yourself. 

When you get a credit card, you’re responsible for repaying the balance. Credit card companies require you to check a box agreeing to this during the application process. You don’t need to pay the full balance all at once, but card issuers do require that you at least make minimum payments by the due date.

But what would happen if you decided to never pay your credit card bill? There are several consequences to this, and they get worse the longer you go without paying.

A late fee is the only initial penalty

Once you miss a credit card payment, the card issuer can charge you a late fee. You’ll likely see this charge the day after your payment due date. Late fee amounts are capped by the Consumer Financial Protection Bureau (CFPB). By law, credit card companies can only charge up to $30 for a cardholder’s first late payment and up to $41 for a subsequent late payment within six billing cycles.

If you don’t pay your credit card balance in full by the due date, the card issuer can also start charging you interest. That’s why it’s recommended to pay your balance in full every month.

There normally aren’t any other penalties for the first month. Also, most card issuers will waive your first late fee with them if you call and ask.

Some people worry that their credit score will suffer as soon as they’re late on a payment. It actually doesn’t work like this. A creditor can only report your account as past due when it’s at least 30 days late. If you make your credit card payment 29 days after the due date, it would still be considered on time on your credit history.

After 30 days, the consequences pile up

Once your credit card payment is 30 days past due, that’s when the consequences get significantly worse. Here’s what will likely happen:

You’ll keep incurring more credit card interest and late fees. Interest charges will continue accumulating as long as you don’t pay your card balance. Also, the card issuer could charge you the initial late fee of up to $30, then additional late fees of up to $41 every subsequent time you miss your payment due date.At 30 days, your credit score will drop due to being late on your payment. Your card issuer can report your account as past due at this point, and even a single late payment can cause your credit score to drop by up to 110 points. Your credit score will decrease again your account is 60 and 90 days past-due.At 60 days, the card issuer can legally apply a penalty APR to your account. A penalty APR is a higher rate on both your current balance and future charges.

During this time, your card issuer will contact you by phone, email, or letter reminding you that your account is delinquent. These notifications will let you know about further consequences if you don’t make a payment.

Your credit card account will be closed and sent to collections

Eventually, the card issuer will charge off your account. That means it will close your credit card, write it off as a loss, and send the debt to collections. The card issuer may have its own internal collection agency, or it may sell the debt to a separate collection agency.

The charge-off gets reported on your credit history, which does even more damage to your credit score. You can also expect debt collectors to start contacting you and trying to get you to pay up. At this point, it’s wise to learn about dealing with collections so you know your rights.

When will this happen? That depends on the card issuer. It’s typically when your credit card is between 120 and 180 days past due, according to Equifax. However, there are no guarantees. It could happen sooner. It could also theoretically happen after more than 180 days, but that’s highly unlikely.

You could be sued

Your credit card company can sue you for unpaid credit card debt. This would normally happen after your account is 180 days past due. Or, if the card issuer sells your debt to a collection agency, the collection agency could file a lawsuit against you. It may do so if it’s unable to recover the debt from you.

Unpaid credit card debt doesn’t always result in a lawsuit. It depends on the card issuer or debt collection agency and the amount you owe. A credit card company is going to fight harder for $20,000 in debt than for $200. If you lose a lawsuit, your wages can be garnished, and liens could be put on property you own.

The price of not paying your credit card bill is steep. It does significant damage to your credit score, plus you’ll rack up fees and interest. Make it a goal to pay your credit cards in full every month. If you ever find that you can’t pay, contact your card issuer to go over potential options.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Sometimes cash is still king. 

You can earn valuable credit card points by using rewards credit cards. But as much as I love earning credit card points, I know that I won’t be able to swipe my credit card every time I shop or visit a restaurant. If you usually pay for your purchases using credit cards, you may still want to keep extra cash in your wallet. Here are a few reasons why.

1. Avoid unnecessary ATM fees

While ATMs are convenient, they’re not always free to use. If you need cash and withdraw money from an ATM that is not in your bank’s network, you should expect to pay a fee — unless, of course, your bank reimburses ATM fees, as some banks do. Checking account fees (like out-of-network ATM fees) can add up faster than you realize. By keeping cash in your wallet at all times, you can waste less of your hard-earned money.

2. Some businesses only accept cash payments

While many establishments accept debit credit and credit card payments, that isn’t always the case. Some businesses prefer to accept only cash payments to save money on merchant fees. If you stumble upon a cash-only business, you’ll be forced to find a nearby ATM or go elsewhere. But if you keep cash in your wallet, you’ll be prepared.

3. Easily split the bill with friends

If you’re dining out with a friend and want to split the cost of the bill, it can be easy to do that when you have cash in your wallet. Payments apps provide another way to split expenses with friends and family, but not everyone uses the same payment apps — so that may not always be a convenient option. If you have cash, you can split the bill quickly without using apps.

4. Avoid paying credit card convenience fees

When businesses accept credit card payments, they pay credit card processing fees. Some businesses pass credit card processing fees on to the customer to reduce operating costs. If you visit a business that charges a credit card convenience fee, you’ll be paying more money than necessary for your purchase. But you can avoid this fee if you have cash on hand.

5. You can leave cash tips

If you have cash in your wallet, you can leave cash tips when dining out or when you encounter a situation where you want to tip an employee. Cash is a win for tipped employees because they can immediately walk away with cash when they finish their shifts. Some tipped employees wait a while to receive credit card tip payments. And who doesn’t love to be paid in cash?

Don’t give up on credit card points

If you like earning credit card points, use rewards credit cards when you can. But it’s not a bad idea to stash some cash in your wallet so you’re prepared to use cash when necessary. It may be easier to pay for some purchases with cash, and in some cases, you may save money. Check out these personal finance resources for additional money tips.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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There’s not necessarily one right answer to this question. 

Savings accounts are offered by credit unions, online banks, and local and national banks. They are typically FDIC insured so there’s essentially no risk of losing money that you put into them. And they typically pay at least a small amount of interest on the deposited funds, so you can earn a small return on your money.

But, should you make use of this type of account? Is it really a good place for your hard-earned funds, or are you better off exploring other options?

Savings accounts are the best place for some of your money

Savings accounts are the perfect place to keep money you can’t afford to lose, you may need soon, and you don’t want to spend.

If you are saving up cash for a purchase you will need to make soon, such as saving for a down payment to purchase a home in a year or two, that money belongs in your savings account. You don’t want to make a risky investment with the funds and jeopardize your homeownership dreams. You also don’t want to put money into an illiquid investment because you might not be able to sell and get the funds back in time to follow through with your goals.

You should also keep money saved for emergencies in a savings account. That way, you can access it if you need it but it won’t be mixed in with other checking account funds so you’re less likely to spend it. Since your emergency fund will hopefully sit for months or years waiting for a potential emergency to strike, it can also be helpful to earn at least some interest on the cash.

Savings accounts are the worst places for other funds

Although savings accounts are the best place for your money in the situations described above, they are not a good place for other funds.

You likely don’t want to keep your routine spending money in a savings account because the cash can be harder to access. Until recently, a federal law called Regulation D limited you to six withdrawals from savings accounts per month. While this is no longer the case, many savings accounts don’t offer debit cards or other easy ways to get ahold of your money because, after all, the purpose is to save it not spend it.

You also don’t want to put money you are going to need for retirement, college costs, or other long-term goals in a savings account. Even the best savings accounts usually provide a pretty low return on investment. This ROI may not keep pace with inflation, and it definitely won’t help you harness the power of compound growth to build wealth. It won’t enable you to take advantage of tax breaks either, which might be available with other accounts like 401(k)s, IRAs, and 529 plans.

Ultimately, whether you should put your money in savings or not depends on what you plan to do with it. You should consider whether you’re trying to invest or save, and look into whether other accounts could provide tax benefits before you decide if a savings account is right for you.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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