Using Your Tax Return To Improve Your Finances
Tax season is right upon us, the date to start filing your taxes is officially January 19th this year. With that in mind, this is the perfect time to give your personal finances an added boost. This boost should be to improve your personal finances not to just splurge the extra funds on a nice trip or a new car.
Many Americans think that a tax refund is “extra cash” for spending but that’s the worst thing you could do with your return. In fact, some of the best things to do are to invest it into another aspect of your finances.
If you are someone that gets a big tax return for the year, you may want to use it as a starting amount in a savings account. At first, you might find it difficult to put so much money away, but it will be worth it for your finances in the end.
Savings funds are vital for emergency situations and for any big expenses later. Having money set aside in an account as a backup plan will give you more financial security and give you a flexible budget.
If you do receive a hefty payout from the IRS, you should seriously be thinking about putting a good amount of that money toward any outstanding debts. This is an easy way to get some small debts out of the way without having to use a big portion of your monthly finances.
A good place to start is with any credit card debt or debts that have low balances in the hundreds or that are under $1,000. You will be able to finish paying off those debts and have less bills to worry about in the end.
However, for the few that feel that they want to put their entire tax return toward their debts, that is a good idea too. But try to spread the return across a couple of debts, not just one, so that your entire debt load gets reduced.
3. Emergency Finances
If you already have a savings fund, but see that it is low, this would be a good time to start an emergency fund. A common misconception is that emergency finances and a savings fund are the same thing, but they are totally different.
A savings account is for spending later on bigger items like a house or a car. An emergency fund, is for quick fixes in your personal finances like losing a job, or an unexpected life event. Emergency finances are funds that are supposed to temporarily alleviate any financial situation you might have for the moment; it isn’t meant to last forever.
Think about putting a small percentage of your IRS Tax return into an emergency fund, separate from your savings account so that you can have it in case anything does come up.
If you have any outstanding loans, this would be the perfect time to make an extra large payment. You could finish paying off your loan faster and get out of that loan debt in no time.
A good loan to put it toward, is an auto loan or school loans. These loans might seem small at first but they grow over time due to interest rates. In fact, some times the interest on these loans can outweigh the principle amount.
Go ahead and make a big lump payment and you will be able to put less pressure on yourself in the next couple rounds of monthly payments. Also make sure that you at least put the same amount of your monthly payment or more, or else making a payment will be useless.
Things Not to Use Your Tax Return On
I know getting a big chunk of money from the government can be a tempting thing and doesn’t happen regularly, so it’s easy to spend it fast. However, there are certain things that aren’t the best expenses when it comes to your tax return. Some of these are:
Taking a nice relaxing vacation is a great thing but it should be thought through accordingly. Weekend trips can cost upwards of $3,000, which could mean your entire tax return for some. Not to mention, the spending money you will need once you’re there will come from your normal finances.
This decision could cost you more than just your tax return, it could ruin your monthly budget and put you in financial problems for months to come. Be wise about your tax return and use it wisely.
Buying A Car
When you buy a car, you may want to put down as much money as possible in the beginning in order to lower your monthly payments and decrease the term of your auto loan. However, you have to think about your regular monthly budget.
Can you monthly finances handle the burden of your monthly car payments? If the answer is no, then maybe getting a car at this moment isn’t the best thing for you. However, you could save up just a little bit more so that your monthly car payments are affordable and fit into your budget.
When getting a lot of money, it can be difficult to not want to spend it on all the items you’ve had your eye on for a while, but you need to. First off, because a shopping spree should only be done on special occasions and secondly, because shopping sprees can lead to over spending.
Instead of using all of the money on a shopping spree, think of spending those funds on something of more quality that will last you longer and be more useful in your life. You don’t want to regret buying all those items in a month and not be able to get your money back.
A Tax Return Is a Good Thing for Your Finances
A tax return is a good thing, when used wisely but you have to be careful on where you plan on putting these extra funds. The best thing to do, is put the money into an account where you can improve you finances and you won’t be tempted to spend it right away. Instead, write down a list of important things your could spend your tax return on. Give yourself some time to think about these items, and make a final decision based on a list of pros and cons.
Making a hasty decision with your tax returns could cost you in the end, even more than you think. Be smart and make a decision that will not only be better for your future but also lead you down a path of financial success.