It’s tax season and you are looking forward to the tax refund being deposited into your account. Whether it was higher or lower than expected, it still ‘feels’ like free money. When you get a windfall of cash, it is easy to splurge on things you may regret a few days down the road.
Instead of seeing a refund as a windfall, consider looking at your refund for what it really is…an overpayment of your own hard earned money the government is returning to you. A refund is the result of your employer taking too much out of your paycheck each week, leaving you with an overpayment. Adjusting your W-4 can lower your refund next year, leaving you with more money in your pocket each paycheck. In the meantime, you now have the interest free loan you gave the IRS, being paid back.
A loan repayment ‘feels’ a lot different than a lottery winning.
Viewing the refund from a new perspective can impact how you choose to spend it.
Long Term Financial Needs
Long term financial goals are hard to reach because they can feel so daunting. The more overwhelming a goal feels, the more likely you are to procrastinate getting started. Your small regular deposits may not feel like they are even making a dent in the big picture.
Adding to any or all of these four key, long term financial goals is not about getting you 100% of the way, but about moving you closer to your long term financial goals. When you try to wrap your head around having a million dollars for retirement or $100,000 for your child’s college, it might seem like adding a few hundred dollars each year from your tax refund is not substantial progress. However, adding a chunk of money to these long term needs can get the ball rolling a little faster, increase the impact of compounding, and help you see progress towards your ultimate goals.
Pay Down Debt. High interest credit card debt siphons money from your budget that could be used for other things, including building a stronger financial portfolio. That money could be used to put more in your retirement account, pay for a vacation for your family, or lower your retirement age. Instead, you are paying hundreds of dollars in interest that is only increasing the lenders bottom line. This weight of high interest debt can prevent you from having ‘extra’ money to pay for today’s and tomorrow’s needs. A tax refund is unlikely to get you completely out of debt. Find one credit card or collection account and take enough to put that debt to rest.
Increase Retirement Savings is a smart way to spend a refund check because you can double up on tax benefits to increase savings. A traditional IRA allows contributions until the tax filing date, which gives you an additional tax deduction that can increase your refund. Even if you have a company 401k, you may qualify for the pretax Traditional IRA benefit. For those with income levels below $61,000, you may also be able to double dip with the retirement savers tax credit. These tax benefits can make your money go farther during the tax season. Roth IRAs are also available for contributions until the tax filing deadline but do not provide an initial tax benefit. However, the funds grow tax free giving you a greater long term benefit.
Adding to Your Childs College Account is another good use for a tax refund. With college costs rising much faster than inflation, paying for college, without sending your child into heavy debt, is becoming more problematic. Students are often taking five years to finish school, and at $30,000 a year, that starts to look more like the cost of buying a small home. With college loans extending to 20 or 25 years in repayment plans, it looks like a mortgage to many graduates. Assisting with college costs through tax preferred college accounts it one way to head off this debt disaster so many graduating students face.
Add to Your Emergency Fund. Experts recommend having 8 months of household expenses saved for emergencies. This is in addition to funds for vacations, intermittent bills, and other expected costs you might want to plan for. This account is not built overnight and any amount that can be added will provide a long term financial benefit and an increase in financial security for you and your family.
Short Term Financial Needs
Short term needs can often be paid in full with a windfall like a tax refund. Doing so may enable you to get through the year without taking on additional debt to cover financial needs that come up over the year. It can be frustrating to pay down debt and then find yourself adding back what you paid off to cover a car repair, quarterly insurance premiums or other unexpected expenses.
Pay Quarterly, Semi Annual or Annual Bills. Using your tax return to pay your car insurance or homeowners insurance in full frees up money for other needs. Taking care of these up front will often result in premium discounts and eliminates the need to use a credit card to cover the bill.
Home or Car Maintenance should be completed on a regular basis. When money is tight, they are often the first to be neglected. There may be repairs that need to be done but have been delayed because it hasn’t hit the crisis stage. Taking care of these issues while they are small and manageable will save you money in the long run. Call the plumber and fix the drip under the sink or invest in new tires for your car. These expenditures may prevent more expensive costs, like a new floor or a car breakdown on your way to work.
Pay for A Vacation. We often see vacations as fleeting and frivolous and it may be hard to justify when you are staring down unpaid bills and an underfunded retirement. Americans have dismal numbers when it comes to taking vacations which support the idea that this is a privilege only for the wealthy. Fewer people go on vacation today than in 1976, according to the Bureau of Labor Statistics, and 9.2 vacation days go unused each year. Statistically speaking, taking a vacation will give you better overall health, more productivity, lower your chances of burn out, and lead to greater happiness by taking regular vacations. Yet, you might feel guilty using funds for ‘play time.’ A vacation does not need to be extravagant, nor does it require thousands of dollars. Camp at a state park, take a staycation and discover fun things in your community, or travel off season. Getting away from work and spending time with loved ones provides mental and physical relief without breaking the bank.
How to Decide Where to Spend Your Refund
Make a list of all the possible uses for your tax refund and then prioritize based on your needs. Decide what is the best use of the money that will meet both short term and long term financial goals. Set aside a little fun money and feel good that you are making progress towards your financial goals.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you're just not seeing your balances go down, call Timberline Financial for a FREE financial analysis today. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don't have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website here http://timberlinefinancial.com/contact-us/.