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It’s everyone’s favorite time of year again – tax time.
LOL, just kidding.
I know that many Americans dread tax season. Even with do-it-yourself websites such as TaxSlayer, H&R Block, or Tax Act, you still must gather all your documents and sit down to fill out the complex tax forms. And if you’re self-employed or own your own business, things can be extra complicated.
For some, filing your taxes does come with one exiting thing – tax returns.
But, there’s always a but, getting a tax return comes with so many options. Should you save it? Spend it? Invest it? Pay off debt? Some of these choices can be the difference between you improving your financial situation and leaving you worse off.
What is a Tax Refund?
First thing first, a tax refund is the amount of money that has been overpaid in taxes throughout the year. It’s not free money from the government nor is it a bonus. It was always your money, to begin with. You’ve just been loaning the government way too much of your hard-earned money with each paycheck and they are handing it back to you. That’s why it is called a refund.
How Should You Use Your Tax Refund?
Tax returns are a lifesaver for so many of us. You may even receive a couple of thousands of dollars back and it’s so easy to spend it all carelessly, but there are much better things you should spend that money on.
Receiving a tax refund is a great chance for you to put yourself in a great place financially now and/or in the future. It’s very important that you make sure that you are putting your money to work for you.
So, whether you are anticipating, or you are excited about receiving your tax return this year, below are 5 things you can do with your tax return this year.
Create an Emergency Fund
It’s been often reported that the majority of Americans don’t have enough cash money saved to cover a $1,000 emergency. Don’t be ashamed if this is you. This used to be me as well.
Without savings, you’re vulnerable to a job loss, medical emergency, or a major repair. Without adequate savings, you’ll be forced to rely on credit to cover those expenses, sending you further into debt.
Consider using your tax return to create an emergency fund. You’ll sleep better at night and be at ease because now those emergencies will be mere inconveniences.
Pay off Your Debt
Do you have any lingering debt on credit cards, student loans, auto loans, etc.? This is what I suggest you should prioritize first. Most debt accounts are interest-bearing so it’s best if you wipe out your debt as soon as possible if you can.
Why continue paying interest to your lenders if you can pay them off now? Using this method allows you to get out of debt and put more money in the bank monthly once those minimum payments are gone. An extra lump sum payment can make a huge difference.
Fully Fund Your Sinking Funds
Saving for expected and/or expected expenses is a great way to keep your monthly budget intact. Use your tax return to store away money to pay your annual auto insurance premium in full or create a savings fund for Christmas. Those expenses are anticipated, but you can also create a savings account for things that you may not expect having such as a flat tire on the way to work or a roof leak. Stay ready so that you don’t have to get ready when these things arise.
Get ahead on Your Bills
One of the greatest budgeting hacks that I’ve discovered is getting a month ahead on bills. There’s so much comfort in knowing that if you and/or your spouse need to be out of work unexpectedly or if either of you loses your job, you’ll be able to cover your monthly expenses for the next month, giving you a bit a breathing room. This time will allow you to determine how your budget should be reallocated or look for another job. Removing that added layer of stress with help make that process much easier.
Add it to Your Retirement Account(s)
Tax time is a great time to add additional funds to your retirement account. Since these funds weren’t a part of your paycheck anyway, sock them way in a Roth or traditional IRA account for use when you are no longer in the workforce. Your future self will be thankful that you have the foresight to save for retirement when you were younger rather than spend it up on something you will more than likely have forgotten about. Even if you have a lot saved now, don’t fret. The power of compound interest is a beast.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”– Albert Einstein
Getting your tax return may make you feel like you’ve just won the lottery. But, it’s not free money and it shouldn’t be wasted. Whether you choose to pay off debt, save or invest it, the best thing I can suggest is to have a plan in place before you receive your refund. Then, once it’s in your account you will choose to do the responsible thing and not throw your hard-earned money away on things that you do not need.
This tax season, and each one after, I challenge you to be more responsible and use your tax return to do any or all the suggestions included above.
How do you plan to use your tax return this year?