Making the Most of Your Tax Return
Using Your Tax Windfall Wisely
March 13, 2017 by Jake Butler
With tax season upon us once again, it’s time to consider the best ways to spend your refund wisely. The money can provide some financial relief, but how do you make it work smarter? Do you splurge on yourself? Tuck it under your mattress? Pay off debt? If you’re getting money back from Uncle Sam this spring, don’t spend a dime until you’ve considered these seven tips.
PAYING PAST-DUE DEBT
It's simple – paying bills late could ruin your credit score and put your military future in jeopardy. So your first choice should always be to catch up on any late payments. Whether you owe a lot or just a little, and even if it doesn't pay off your entire balance, it shows a good faith effort to pay off the debt. Late payments are always better than not paying at all.
CREDIT CARD BALANCE
Don’t forget about those credit cards! If you can afford to make more substantial monthly payments it’ll save you money in the long run by avoiding interest charges. Making the minimum payment each month could take you longer to pay off the debt than you think. For example, if you owe $2,500 at 21.99 percent interest, it would take you more than a decade to pay off with minimum payments. Keeping your balance as low as possible also helps improve your credit score.
From unexpected auto repairs to medical emergencies, there are countless reasons to build a financial safety net with your extra money. As a good rule of thumb, you should try to save up enough cash to cover six months of living expenses – including rent, utilities, food, transportation, and any other vital costs. Paying into a savings account gradually throughout the year is a good strategy, but a boost from your tax return can also help you make progress.
SAVING UP FOR SOMETHING
All caught up on your bills? Feel like you have a good emergency fund saved up? Then you could consider contributing to a college fund, retirement plan or other investments to make your money work for you. If you don’t already have a 401(k), it’s never too early or too late to start one.
A FAMILY VACATION
Taking some much-needed R&R is a great way to connect with the family, your spouse or even yourself. Whether it’s some high-quality beach time, a trip to an amusement park, or even going to see family and friends far away, your vacation could be significantly less stressful if it’s covered in cash.
THAT BIG PURCHASE
Are you debt-free with plenty of savings? Then tax season might be the best time to make a large cash purchase without putting yourself under a pile of debt. Whether it's putting a down payment on a more reliable car, replacing worn out furniture, or other big-picture purchases, a tax refund check can help cover the costs.
ADJUST YOUR WITHHOLDING
A tax refund is exactly that – a refund that the IRS owes you. If you’re getting a big return, consider lowering the amount of tax withheld from your paycheck. You won’t get such a hefty windfall next tax season, but it could create more wiggle room in your monthly budget throughout the year.