Three Reasons Not to View a Big Tax Refund as 'Extra Money'

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by Darlene Aderoju


A big tax refund is nice, but not necessarily a good thing. Now that income tax season has ended and you await your refund, it's a good time to ask: How will you spend that money? If you're one of the many people who views a tax refund as "extra money," you might want to change your approach. And because April is Financial Literacy Month, what better time to re-think your refund?

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 tax refund - consider readjusting your tax withholding by submitting a new IRS Form W-4 at work.

Here are three ways you can use your refund to get back on track financially instead of spending it like extra cash:

1. 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 refund 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. 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.

3. 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 savings account or a 529 Savings Plan.

One more thing to do while the topic of taxes is still fresh in your mind: 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 for which you might qualify 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.

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.

This content originally appeared on americasaves.org and is used with permission.

 

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