Tax season will be wrapping up soon, and with some luck and a few deductions, you may be anticipating a refund. That will be the focus this month in our ongoing series, How To Develop A Spending Plan and this month we focus on what to do in April.
Maybe you’ve thought of some ways that you’ll use the money you get back, like some new clothes or a new big screen TV. While those are great options, if your refund is more than a couple hundred dollars there are much better ways to use that money
Ways that will help put you ahead financially instead of feeling like you’re always catching up.
HOW TO DEVELOP A SPENDING PLAN – APRIL
For most of us, we think of tax season, and our refund check like a savings plan.
All year with little thought we head out and buy what we want with little consideration to what we are doing. Before we know it, we’ve racked up some pretty good debt.
Now maybe this is the first time for you, and so your refund check covers your credit card bills, and you think – “great I’ve got it covered.”
But if this isn’t your first go around, your refund probably won’t cover the total amount of your debt.
And this creates a vicious cycle of spending and attempting to paying off credit card bills.
Believe me; I know this dog and pony show all too well. This was my behavior many years ago. Eventually, my refund was a small drop in the bucket compared to what I owed on my credit cards. In the end, I ended up with over 50K in credit card debt and no tax refund was going to “cover it.”
But we all need to start somewhere right? So if you’re getting a refund, let’s be smart about what to do with it.
Give the money a purpose, put it to good use instead of frivolously spending it. Think about your current financial situation, and figure out what you need the most. Here are several priorities you may want to consider to improve your financial situation.
PAY DOWN HIGH-INTEREST DEBT
A large payment toward a high-interest credit card or loan can not only improve your budget, but it can also boost your credit rating. Especially if you can completely pay off your highest-interest debt and keep it open. Put your refund to work for you by eliminating debt or, at very least, paying it down.
Once this is done, you may be in a better position to negotiate a lower interest rate on any future charges. Wait a few months, long enough for your credit card company to report the new balance to the credit reporting agencies and your credit rating to improve, then call your credit card companies and ask for a lower rate. Your improved credit rating will go a long way to reducing your interest rate.
BUILD YOUR EMERGENCY FUND
Without a backup emergency fund, you’re just one unexpected significant expense away from big financial trouble. If you don’t already have an emergency fund, your tax refund is a great way to get one started. And if you already have one, your refund will improve your financial security.
There are two types of funds you should have and regularly fund. The first is an emergency fund with about 2K in it. This fund covers those unexpected financial nightmares that can creep up on us and derail our budgets in the wink of an eye. You know the ones I mean – the furnace needs repair, the water tank just sprung a leak, the car needs new brakes. This account is the first that should be fully funded.
The second account is a short-term savings account which should be equivalent to about six months to a year of your take-home pay. This fund is used in case of accident or illness or job loss. It ensures you don’t end up losing your home or homeless. Saving that much can take months or even years if you’re just putting a little aside from each paycheck, but your refund can significantly boost that fund at one time.
START A RETIREMENT ACCOUNT
Using your refund to start an interest-bearing savings account, IRA, or investment account for your retirement fund is a great way to make your money work for you. And it will provide you with a little peace of mind knowing that you’re working toward your future instead of just hoping for the best. Getting your retirement fund started with a significant deposit will also encourage you to keep adding to it. You’ll be inspired to find ways to cut back expenses so that you can finally budget retirement savings into your monthly plan.
REFINANCE YOUR MORTGAGE OR MAKE HOME IMPROVEMENTS
Your home is your biggest investment, but it’s probably also your biggest expense. Using your tax refund to reduce your monthly payment or improve your home for better resale value is a great way to put your money to good use. A lower interest rate may be available with your current mortgage company or another one, but when you refinance there are closing costs and fees to pay that add up and can be expensive. Using your refund to pay these fees will save you money in the long-run on your mortgage as well as reduce your monthly burden.
If you feel like you have a decent mortgage rate, then take a look around your house. Are you in need of a new roof? Would new energy-efficient appliances lower your utility bills? Home improvement projects can significantly increase the value of your home while also making it more comfortable to live in.
USE IT FOR SOMETHING YOU REALLY NEED
Is your car just barely getting you from point A to point B? Are you overdue for a checkup with your doctor? Have you been putting off necessary dental work? Your refund can help you take care of these essentials and reduce the stress of knowing you need to get them taken care of but can’t afford them.
But a word of caution. This money needs to be spent on NEEDS and not wants. If you’re in debt, eliminating it must be your priority in conjunction with establishing your emergency fund. From there develop your short-term savings account and finish paying off debt.
If a tax refund is headed your way, it may be tempting to use the money for something you really want instead of something you really need, but using that money toward something that provides security for you and your family or reduces your debt is the best way to make your money work for you. Don’t get caught up with online shopping or dog-earing pages of catalogs that come in the mail. Instead, improve your financial situation to make life better for everyone in your home.
DONATE TO CHARITABLE CAUSES
If your budget is tight, making charitable donations is something that easily gets overlooked in your budget. Your refund gives you the opportunity to give something back and feel good about yourself. Contributing to charity you believe in is a wonderful use of your money, and it provides a huge community benefit. As an added bonus, you can claim a tax deduction on it next year.
BUY LIFE INSURANCE
You may think you have plenty of time to think about things like life insurance, plus it really doesn’t fit into your budget right now. But if you’re married and have a family, it’s the responsible thing to do. After all, tomorrow is promised to no one. A term life policy can provide the protection your loved ones will need should something happen to you at a relatively low cost. For a few hundred dollars, your tax refund can give you peace of mind and allow your family to maintain their standard of living if the unthinkable happens to you.
Using your tax refund responsibly, to pay down debt, lower your bills, or give you more security, will allow you more money in the long-run to do other things you want to do. Reducing your monthly credit card payment will free up more money for vacation savings or date nights. You work hard for your money. For once, let your money work hard for you.