3 Reasons Not to Consider a Big Tax Refund “Extra Money”
When you receive your tax refund, how do you usually spend it? If you’re one of the many people that views income tax as “extra money,” you might want to change your approach.
Much of your tax refund is actually hard-earned money that you worked for throughout the year, so you should spend it wisely. If you think you’ll make better use of your money by receiving more each paycheck, instead of one lump sum through your refund, consider readjusting your tax withholding by submitting a new IRS Form W-4 at work.
You should also find out if you qualify for refundable tax credits. Refundable tax credits can reduce the amount of taxes you owe or increase your refund. The Earned Income Tax Credit is a refundable tax credit that you may qualify for if you earned up to $53,930 last year. You might also qualify for The Child and Dependent Care Credit, The Child Tax Credit, The Retirement Savings Contributions Credit or the American Opportunity Tax Credit. These tax credits could really make a difference in your refund if you’re eligible.
Here are three ways you can use your refund to get back on track financially instead of spending it like extra cash.
1. You can use your refund to pay down credit card debt.
Paying down your credit card debt is one of the best ways to spend your income tax because once you get rid of your past debt, you can focus on your financial future. If you have a lingering balance that you’ve carried over for several months, getting rid of this consumer debt should be your top priority.
Your credit card balance increases not only by what you purchase, but also by added compounded interest, so the longer you wait, the more you’ll pay. Use that “extra money” to pay off what you owe. You’ll feel much better when you get the burden of debt off your chest.
2. You can use your refund to build a rainy day fund.
If you lost your job today, would you be able to sustain yourself for the next three to six months? If you answered “no” to that question, you should start building an emergency savings fund. Your money is always better off in your account than someone else’s, that’s why you should pay yourself first and set money aside for your emergency savings fund every payday.
Whether you catch a flat tire, crack your cell phone or need to travel for a family situation, you’re going to wish you had money set aside to solve your problem. Use your “extra money” to jumpstart your emergency savings.
Here’s an added bonus: if you save at least $50 of your refund by splitting it into two accounts using IRS Form 8888, you can enter SaveYourRefund for a chance to win up to $10,000. Learn more about the SaveYourRefund promotion and see how you can save to win.
3. You can use your refund to invest in your future.
It’s never too early to start planning for retirement or saving for your child’s education. Use your “extra money” to get a head start on your financial future.
Consider automatically saving a percentage of your paycheck into an Individual Retirement Account (IRA) or a 401(k). Be sure to maximize your retirement savings by enrolling in employer match if that option is available to you.
If you have a child that you hope will attend college one day, you can begin saving for their education now. Consider starting a 529 savings plan to save for your child’s education.
When you receive your tax refund, make the best of it. Don’t spend it on temporary things like clothes and shoes. Invest in yourself today so you can reach your financial goals tomorrow.
Written by Darlene Aderoju