Thursday, May 03, 2012

8 Ways to Apply Your Tax Refund

It’s that time again - time to get back your tax refund. If you haven’t filed yet, what are waiting for?  We all could use some extra money.  Unfortunately, for many Americans in this economy getting a tax refund means it will be spent as soon as you get it.  If you are struggling to pay bills or need to get out of debt your tax refund can be a lifesaver. 

We have been conditioned to believe that it is great to get a tax refund when we file taxes.  The best way to get your tax refund is to increase your tax withholdings and get your money back during the year.  Pay yourself instead of paying the IRS.  Getting a tax refund gives the government free money which is put into a high interest account.  The government keeps the interest and gives the money back to you during tax season.

If you are not very disciplined and don’t manage your money wisely avoid getting a tax refund and adjust your tax withholdings during the year. In some cases getting a tax refund can cause taxpayers to be worse off than they were before they got the refund because they spend the money frivolously and go deeper into debt.  Don't make that mistake.  Use your tax refund wisely and improve your financial situation.  Here are 8 ways to apply your tax refund.

  1. Pay down debt.  Pay collection accounts, judgments, liens, and any other late accounts, then pay down credit card balances to 20% or less of the credit limit, then pay any other debts.
  2. Create an emergency fund.  Create a savings account to cover bills for 9-12 months.
  3. Invest. Start a retirement account.  If you don’t have a retirement account with your employer sign up immediately.  You can also start you own individual retirement account (IRA) in addition to your employer account.
  4. Save.  Save for your children's college education. If you haven't already done so start saving for your children's college education.  College tuition increases at 3 times the rate of inflation.    
  5. Wealth. Purchase a home. Now is a great time to buy a home.  Use your tax refund to put towards down payment and closing costs.
  6. Increase job skills. Take a class or go back to school to enhance your skills at work. This can increase your chances of staying employed or help you find a job.
  7. Repairs.  If your home needs major repairs use your tax refund to fix them.
  8. Give. Make a tax deductible donation which you can write off on your taxes next year.

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