With the deadline to file federal tax returns only a few weeks away, people across the country are doing one of two things – crying into their keyboards because they owe money, or wringing their hands in anticipation of the refund to be sent by check or delivered directly to their bank account. For those receiving refunds, there’s an overwhelming temptation to spend all the money at one time. Unfortunately, the misuse of a refund can lead to a bout of over-spending, leaving once elated folks in a depressing spiral on how they’ll pay off their new set of debts. The best way to avoid this circumstance is to include the tax refund into your budget plan. Here are some tips on how to maximize its potential.
Pay Down Outstanding Debt
A tax refund can help you get ahead of the cycle of never-ending payments on outstanding debts. By paying off as much of the smallest debt first, you maximize the power of the refund. Doing this can eliminate one debt altogether, allowing you to invest the payments previously made into it on another outstanding one. If there is money left over after payment of the lowest bill, focus the remaining amount of the refund on the next largest debt.
Invest in Your Residence
Those without outstanding debt have the option to allocate their tax refund into the household section of their budget. For instance, consider investing an extra payment toward the mortgage principal. Should you pay items like home insurance or property taxes outside of your mortgage escrow, think about budgeting the refund into these categories. Are you part of a condo or home owner association? If so, apply your refund toward these items in order to free up your regular funds for other opportunities. In addition to these options, look at your budget to determine if the tax refund is needed for any infrastructure improvements that you’ve put off on your property.
Prepare for Next Year’s Tax Season
While you may have received a sizable refund this year, you don’t know what the next year will bring. If you’re taking on extra jobs, starting a business, having a large debt forgiven, or withdrawing funds out of a retirement account before its maturity, you can be subject to extra fees and taxes come next year. Examine your budget and business plans to determine if anything will affect your bottom line come filing time. If so, consider investing all or part of this year’s refund toward what you may eventually owe.
Spend a Little, Save the Rest
If none of the above situations apply, the best recommendation is to put your tax refund into an emergency or savings account for future use. Should your emergency fund be fully invested with three to six months of household expenses, think about putting it into a mutual fund or IRA account. Just make sure to take out a little bit to enjoy yourself.