Are you expecting a tax refund this year? If yes, you need to execute a good plan regarding what to do with the money. You may have already earmarked the amount that you’re going to receive for different expenses but if you don’t want your tax refund to blow a hole in your wallet, don’t forget that the government is not sending you a bonus check but they are actually giving you money which was always yours.
If you’re about to receive a huge refund, you probably had too much money withheld. Make sure you check your W4 form and again adjust your federal income tax prohibiting allowances. Don’t make the mistake of treating your income tax refund check in any way that’s different from treating your monthly paycheck. Here are few smart and wise ways of spending your tax refund.
1. Pay off your high interest debt
The biggest possible drag on your bottomline is high interest debt whose interest rate continues to compound against you one month after another. Paying off your credit card debt is the best way in which you can invest your tax refund. When you do this, this will offer you a guaranteed return on the money which is equal to the interest rate which you had to pay to your lending company. In case the amount is higher than the refund, consider transferring your fund to a balance transfer card which offers you low interest rates.
2. Either start or increase you emergency fund
If you don’t have an emergency fund, a single surprise major expense can push you towards an impending financial disaster. Most experts are of the opinion that your fund needs to contain around 6-8 months of savings. Although it’s true that saving this much money may take many months or even years, yet if you think you’re out of every month’s paycheck, you may utilize your refund for a significant deposit.
3. Strategize payments for your big-ticket items
Were you looking forward to funding some big-ticket items like getting a new car or a Botox or your tuition braces? Now that you’ve received your extra bit of money from the IRS, don’t you think you should strategize your big ticket items so that you get enough money to buy them. Bypass the anemic checking account rates by keeping aside money into a high-yield savings account. So, whenever you receive your income tax refund, make sure you take a look at all your necessary expenses.
4. Refinance your mortgage and make home improvements
Even after you refinance your mortgage, you still have to continue with your fees and closing costs. So, when you get the refund amount, you may use it to pay for closing costs and you may even save thousands of dollars every year on mortgage rates. And in case you’re happy with the rate you’re paying on your mortgage, check if your home needs a renovation.
Therefore, if you’re about to receive an income tax refund, you should use it wisely so that you don’t waste your dollars unnecessarily.