Regardless if you’re doing your taxes on your own or if you’re having someone prepare them for you, this is the time of year for W-2s, 1090, 1040s, and 1098-Es amongst thousands of other forms. Millions of Americans will file their taxes before the April 15th deadline and hope for a big refund, but not everyone will get a refund after filing their taxes. In fact, some will owe money. If you did receive a check from the IRS and/ or your state, you might be thinking of all of those things that you can do with your money. Our first thoughts are usually to take a vacation or do some work on the house. But, is that really the smartest thing to do with that money? Here are a few things to think about when you receive your refunds:
1. Pay 0ff Debt – If you receive a refund, consider using it to pay off debts. Credit cards and other loans accumulate finance charges, and sending in extra payments can go a long way in decreasing pay off time. The less time that you spend paying back credit cards, the more money you save in finance charges. If your refund is not enough to pay off an account, consider sending whatever the amount is to the card with the lowest balance in an attempt to pay that off sooner. The idea of paying off debt with tax refunds is not a new one, and many money experts agree this it is a good use for your money.
2. Save it for a Rainy Day – If you don’t have debt to pay off, consider opening a savings account and setting aside your tax refund for a rainy day. Having money in an emergency fund will allow you to worry less about the possibility of falling into debt due to an unexpected event. Even when being careful and not overspending, not having an emergency fund can result in credit card debt in the event of a financial emergency.
3. Save for Kids’ College – With the cost of education always on the rise and student loan debt increasing all over the country, saving for kids’ future college expenses is more important than ever. If you start when your children are young and set aside your tax refund for eighteen years, you could end up with thousands in college funds. When setting up long-term savings accounts, interest will work in your favor!
4. Save for Retirement – How many tax refunds will you receive before you retire? Just about everyone hopes that they can somehow reduce the amount of years before retirement. Consider setting aside all of your tax refunds in a savings account until you’re ready to retire. This savings would in no way be a substitute for more traditional methods of saving, like contributing to a 401K, for example. But, setting them aside for retirement can add up over the years and can end up being a substantial amount when retirement comes around.
Regardless of how much you think you’re going to receive for your tax refund, don’t calculate that money into your budget until you have it. Counting on money that you don’t have is dangerous. Be sure that you understand how the tax system works and realize that you’re not guaranteed a refund. In fact, every year people have to pay the IRS when they thought they were getting a return. If you realize that you’re one of those people, start saving for it well in advance or check your deductions with your HR department.
When you receive your tax refund, be sure that you consider how to make the most of it. Although going out and spending your tax return might be the easiest and most fun way to use it, paying down debt or saving will have long-term benefits. If you have debt, especially credit card debt, using some of your tax refund as an extra payment will lead to a shorter pay off time and money saved on finance charges.