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.