Are you getting a tax refund? Here is what to do and what not to do with it.
Many people get excited about their tax refunds, usually relying on them to fund a new purchase or to to give them a chance to have a little fun money. But what these people don’t realize is that the tax refund shouldn’t be viewed as free spending money. It didn’t manifest from nowhere but was actually a “loan” to the government in which the government paid no interest.
If you do have a sizable refund coming to you, that is great news for your immediate future. You should however, see that as a sign that you need to change withholding amounts. Avoiding a large refund at the end of the tax year really means that you have that money when you earn it, and it could be used to earn interest or pay off debt.
Of course, you may have gotten a large refund because you took advantage of government incentives, such as credits for energy efficient improvements to your home. Good for you.
Whatever the reason, you now have that refund, so let us see where it is best spent.
First of all, don’t spend the money because you are expecting a refund. You might be faced with an unexpected expense for which you need that money. Don’t charge items expecting to pay them off when the refund comes in. Why pay extra money in interest.
Take a look at your current bills and see if the refund will eliminate some of your debt. If you pick a debt that can be knocked out completely by the refund, you will get a great sense of accomplishment!
You might also choose to put one third of your refund towards an emergency fund. Having an emergency fund is a very valuable asset. It can save you a lot of grief and expense down the road. Use the remaining two-thirds of the refund to pay down your debt.
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