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5 Ways You Can Use Your Tax Refund To Improve Your Personal Finances

tax refund ahead signYour tax refund is something that you can actually use to improve your personal finances. You just have to figure out the best way to use it based on your unique financial situation.

In February of 2015, the Internal Revenue Services (IRS) will start distributing tax refunds. After you have sent your tax return, your refunds will follow after less than 21 days. This means you can expect to receive this money in your bank account very soon – at least, if you have filed your returns accordingly.

According to Treasury.gov, the average refund that can be expected from the returns of 2014 is $2,696. This is a 1.5% increase from the refund back in 2013. This average tax refund is quite a hefty amount. You can really do something about this money.

It is very important that you use this money wisely. Regardless if your finances is in good shape or not, you cannot just splurge this amount without thinking about your future. As we have learned in the past, things can turn for the worse anytime. One moment everything is okay and the next thing you know, you are neck deep in debt.

Since this is basically an expected amount (although we are unaware of the exact amount), most people already have plans on how to use it. There are both smart and dumb ways to use your income tax refund. If you wish to improve your personal finances, you need to figure out the smart ways to use this extra money.

5 tips to help improve your financial situation through your tax refund

There are actually many ways for you to use your tax refund but in this article, we will only discuss 5 of them. Some people may only need to use it on one of the items on the list while others may choose to split the money and use it in more than one. It really depends on you. It helps to take a look at your financial priorities and your goals to determine which of these will help improve your personal finances the most.

Pay off your high interest credit cards

One of the best ways to put your tax refund to good use is to pay off credit card debt. You may be thinking – why are we prioritizing your credit card balance? First of all, it accrues interest at a rate that is faster than most debts. You are wasting a lot of money because most of your payments will go to the interest alone. It will continue to capitalize as long as you are carrying over a balance each month. The longer it takes for you to pay off your debts, the more you will end up paying on interest. So try to get rid of these high interest debts and please – keep your credit card spending to a minimum. Unless you are sure that you can pay off the balance in full at the end of each month, then do not spend through this plastic card. Learn the proper way of credit spending so you do not have to put yourself under so much debt. If you already have a balance, you can cut back on it by using you tax refund to significantly reduce what you owe.

Get rid of debts with small amounts

If you have two to three debts that can be covered by your tax refund, you may want to use it to eliminate these debts completely. In some cases, people who have successfully paid off a debt end up being more motivated to eliminate the other debts that they have. If you think that you need this motivation to get through all of your credit accounts, then by all means, use your tax refund to close off the smaller debts. This can also help you concentrate on the few remaining debts that you will have left.

Save the money in your emergency fund

Some people would say that saving your money should be a priority because it is the proactive way that you can improve your personal finances. However, paying off your debts usually ends up saving you more money because of the high interest rate that you will eliminate in the process. While this is the logical assumption, you need to look at one part of your savings – your emergency fund. Make sure that before you choose debt over your savings, you already have sufficient emergency funds in the bank. This should help you be more financially secure. At the same time, it will also keep you from the need to incur more debt.

Save for the future

By future, you know that we are referring to retirement right? Your future self deserves this. It doesn’t matter if you are still young and retirement is decades away. Some people are able to retire by 30 because they used their money wisely. The earlier you start, the less you have to contribute. The less you have to put away each month for your retirement, the less of a burden it will be in your budget. It will also help you save more if you start early. According to an article published in CNBC.com, HSBC conducted a global study about retirement trends. Based on the results, they are too much into debt to be able to save up for retirement. This is a sad situation for the Americans and their very bleak future. This is why your tax refund might be of better use to your future.

Save for your improvement

The fifth and final tip for your tax refund is to use it to improve your skills. It may be to get a college education or attend a seminar that will enhance your knowledge and expertise in the industry. You can even use it to buy an equipment that will help in your business. Anything that will give you leverage so you can ask for a higher compensation from your employer. If you get a higher pay, it will really improve your personal finances and may even allow you to fund the other items on this list.

Any extra money that you have – tax refunds, commissions and any monetary gifts may be used to finance any of the items on this list.

How to set up your finances to achieve security

One thing that you can gain when you improve your personal finances is financial security. It is not really about how much you are earning, but how much of your finances can be used to bail you out of a tight spot.

There are so many ways for you to do this year that will help you improve your financial situation. According to IBTimes.com, Americans are expected to save a lot in 2015 because of the falling gas prices. Around $75 billion is expected to be saved this year. You could take advantage of this savings by allotting your budget on something else.

That extra money can be used to grow your savings or invest. If you want to build a better financial future, you need to consider carefully how you can save money especially when there is an abundance of it. That means getting extra funds like your tax refund should be used wisely. Do not increase your spending. Instead, keep your lifestyle as it is and increase your savings.

Although the economy is showing signs of improvement, we should never be complacent. Preparing for the unexpected is the best way to secure not just our finances, but our very lives and those around us.

Four Smart and Nine Dumb Things To Do With Your Income Tax Refund

happy woman with raining moneyMost experts say that it’s not really a good idea to let the federal government keep a bunch of your money just so you can get it back in the form of a refund. We know it feels great to get a big check in the mail but what this basically amounts to is loaning your money to the government interest-free. One way to give yourself an immediate raise would be to stop over-withholding. Visit the IRS W-4 calculator to see if you should make an adjustment in your W-4 at work to have less money withheld. You wouldn’t get as much of a refund next year but you would have extra money every month that you could save or use to improve your life.

As you might guess, most Americans don’t do this. In fact, the average American will get a tax refund of about $2600 for the year 2013. If this is the size of the tax refund you either just received or will be getting, there are four smart things you could do with the money and, well, nine kinds of dumb things.

First, the smart things

1. Use the money to create an emergency fund. Experts say that you should have the equivalent of six months’ living expenses in an emergency fund. If this doesn’t seem doable you should have at least three months’ worth. That way, your bills will get paid on time even if you get sick, suffer an accident or lose your job. This means you will never have to pay late fees, need a cash advance or pay high interest on a credit card.

2. Save on insurance. You may not be aware of this but most car insurance companies will give you a nice discount if you pay your premiums for six or 12 months all at once. You could use a piece of your refund to do that and then put the rest into a savings account. When you have more money in your savings account, you could raise your deductibles – which is an easy way to save 10% to 20% on your premiums.

3. Start a business. A very smart way to use that refund would be as seed money to start a side business or take classes in a skill that you’ve always wanted to master. As an example of this, you could create a website and then sell your own arts and crafts. And if you increase your skills, this could provide the ammunition you would need to ask for a raise.

4. Save for college or retirement. Finally, you could begin funding a 529 college savings plan for your children or an IRA for your retirement. This both plants money you would harvest in the future but could also earn you a deduction on next year’s taxes. You can put as much as $5,500 in a traditional IRA and probably deduct it from your income. Or you could find a Roth IRA with after-tax money but then take it out tax-free when you reach age 55 ½ (or later).

frustrated looking womanNow, the not so smart

1. Spend it instead of investing it. We understand spending the money is a lot more fun than saving it. But consider this. If you were to invest a $3000 refund every year and got an annual return of 10%, you would have $189,000 in 20 years. This could mean retiring a couple of years earlier.

2. Not spending it on something that will reduce year’s taxes. If you just can’t handle the idea of saving the money, at least use it for a home improvement that will both increase your home’s value and create a tax credit. As an example of this, you could buy a solar water heater for $3000 to $5000. This would reduce your electric bill by about 20% for as long as you own the house. Plus, you would get a credit of about 30% of the cost on next year’s taxes. This means if you were to spend $4000 on that heater, your tax bill next year will be $1200 lower.

3. Spend it instead of paying down debt. Are you sure you don’t want to make your credit card company even richer? You can make yourself richer instead by paying off your debt. Today, if you invest your tax refund it’s very difficult to earn 10% but it’s a sure thing if you pay down a credit card that has a 15% interest rate. In fact, paying it off is the equivalent of earning 15% risk-free and tax-free.

4. Not creating a memory. If you put that refund into your checking account and then spend it a little at a time then when it’s over what do you have? Probably nothing much. If you’re convinced that you just need to spend that refund, at least spend it on something that will create a memory. Check out Costa Rico or go to Paris. In other words, do just about anything except letting the money drain away in drips and drabs

5. Loaning the money. Don’t let your friends and relatives know you have a nice refund coming. If so, don’t be surprised if they start hitting you up for a loan. Loaning money to friends and relatives is almost a certain way to turn them into enemies. Plus, you may never see the money again.

6. Not doing something to better yourself. Surely there’s something you could do with that money that would pay dividends at work. Maybe you could use it to take a class that would help you win a promotion or a raise. Or you could use the money to buy a computer and software that would help you make some money in your spare time.

7. Using it to make more debt. At the top of the list of dumb things to do with your refund is using it to make a down payment on a car or some other big purchase – especially an asset that will just lose value or depreciate over the years. Instead, pay cash for a good used car and then go on a cruise.

1040A form8. Taking it to the mall. When you get a check from the IRS you may feel as if you’ve won a jackpot. But this isn’t “found money.” It’s your own money. If you didn’t need a new suit or game controller before that refund arrived, you probably don’t need it now either.

9. Using it to fund an unsustainable lifestyle. One big sign that you’re over your head is if you get a high-interest refund loan or what’s called a refund anticipation check because you just gotta have the money immediately. Make a pledge to never again pay fees or interest to get faster access to your own money. Then go to work and try to do whatever you can to make whatever caused this craziness unnecessary.

Checking on your check

If after having read this article, you’re just chomping at the bit to get your refund, you can go to the page Where’s My Refund on the IRS website to check on its status. Or you can call 1-800-829-1954, which is the IRS Refund Hotline. If your use the automated system you will need to provide your Security number. You will also need to be ready to provide your filing status and the amount of your refund as shown on your return.
If you file electronically, allow at least 72 hours before you start checking on your refund. And if you mailed it, you need to wait at least three weeks before checking up on it.

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