Since we’re in the heart of tax season, I thought I’d share a flashback Friday post with tips for smart spending of your tax refund.
Whether you’re expecting $500 or $5000, how you spend your tax refund can determine how the rest of your year goes financially. It’s exciting to get a huge chunk of change that you normally don’t get. You might think “that could pay for a vacation“. While that may be true, if you find yourself struggling sometimes keeping up on bills, don’t have emergency savings, or are paying credit card debt, there are smarter ways to spend your refund.
1) Catch up
Past due mortgage payments or credit cards can put a lot of unnecessary stress on people. If overall the mortgage and debts are affordable, then catching up with the tax return is a great way to gain peace of mind and eliminate late fees, collection calls, and stress.
2) Pay off debt
Eliminating a monthly payment can make a huge difference in your monthly budget. Consider paying off that credit card balance or car loan to give you a little more breathing room in your budget. If you cannot pay the loan off completely and think you might struggle keeping up with payments the rest of the year, you could try contacting your lender to renegotiate loan terms for a lower payment. (Be careful not to extend terms too long so you’re paying a ton more in interest…and never agree to something you can’t afford.)
3) Make needed repairs
How is your car running? When is the last time you changed the oil, air filter, etc.? Many repair and maintenance procedures are designed to provide optimal fuel efficiency, which can greatly reduce monthly gasoline costs and the potential for larger (and more expensive) repairs down the road. Or, maybe your house is in need of some care. Fixing small problems now, before they create greater problems can save you thousands of dollars in the long run. If your dryer or other appliance is on the fritz, think about replacing it using your tax refund.
4) Save for the near and long-term future
First establish emergency savings; a good goal is at least three months worth of expenses. If you already have that or more in place, consider long-term or even retirement savings. A tax return is a great way to start a Roth IRA. Saving a little now will allow for less frantic saving when you are older.
5) Save toward a goal
If you’re caught up on bills and have money in savings, think about a bigger goal. Do you want to take that cruise to the Bahamas you would have had to charge before? Use your tax return to pay for it instead. Not expecting enough for a trip? Think about saving money for next year’s Christmas shopping; that’s a great way to reduce holiday stress…not to mention the perfect way to avoid building up debt.
If you receive a large tax return, but you are just using it to play catch up every year there may be a better way to distribute your tax contributions. You can use a withholding calculator by visiting the IRS website and answering some questions about your income and family situation. If you reduce the amount you pay in tax, it can provide a boost in your paychecks. Be sure to do this again each January so you do not create a liability problem and have to pay in.
For more info, check out Smart Planning for Tax Season.
Want some more tips to improve your finances? Call LSS today at 888.577.2227 or if you have debt and want to pay it off faster, START ONLINE COUNSELING NOW to determine if a Debt Management Plan is the answer. Our Financial Counselors are just a phone call or click away…and sessions are free!