Using Your Tax Refund Wisely// here is the normal content // ?>
At a recent financial management program, participants and I talked about uses for that tax refund that will be coming in soon. Most in the class opt for minimizing the tax refund by adjusting their exemptions. The reasons, they say, is they aren’t good at estimating a tax payment and they don’t want a surprise bill come tax time. For those in the class who had a tax refund on the way, it was no surprise that they had it spent already.
It’s easy to let money “leak” out of our pockets. We have all played the “how long can I keep this $20 dollar bill in my wallet” game. Somehow as soon as we break it, we don’t know where it went. Research shows that if we have goals we’re more likely to achieve them and if we create goals that are specific enough to include dollar amounts, we are more likely to start working toward them to make them a reality. Making them so specific that we can include them in our monthly budgets almost guarantees we can make them happen.
Here are some of the better ways to use a small or large tax refund.
1. Pay down credit card debt way high on the list. Most in the class wanted to use the money to reduce their credit debt as much as they could. The best practice would be to apply as much as you can to the most expensive debt (highest APR). Going to www.powerpay.org is a great way to create a pay off the debt strategy that will show you the fastest, cheapest way to pay off the debt.
2) Another goal top on the list was jump starting an emergency fund. Research tells us that when income drops because of job loss, injury or disability, it takes families 3-6 months to recover. Having 3-6 months of living expenses in a relatively liquid account puts in place the safety net needed that will cover those expenses and reduce the need for credit.
3) Saving for retirement was right up there as well. Opening an IRA or making extra contributions to an existing retirement fund is an excellent use of the tax refund. Check with your financial advisor for details in opening up an IRA or check out the eXtension.org Investing for Your Future home study.
4) Investing in your home was also suggested. This included making an extra mortgage payment as well as taking on do it yourself types of jobs that would improve the overall value of your home like remodeling a room or landscaping your yard.
5) Using the money to achieve a goal was a common answer as well. Everyone in the class had different ideas of what that might be from saving for my child’s college education to taking that trip for my 25th wedding anniversary. The important idea here is to have set goals and to work toward them.
Ear marking the tax refund for important goals is a great way to use your income wisely. By planning ahead, talking with family members and setting priorities, your tax refund can be stretched to achieve multiple goals.