Tax season is always a pleasant time if you know you have your tax refund coming to you. However, you could be looking forward to it every year if you truly understand just how influential it can be on your financial health.
You may have heard that some people use their tax returns to make substantial payments towards their credit cards. Perhaps you have done this yourself. To anyone who is responsible with money this makes a lot of sense, especially since most people regard their tax return to be “free money.” However, there are many other ways to use your tax refund in order to create a better financial portfolio.
- Pay off credit cards
- Make an extra loan or car payment
- Start an emergency fund
- Plan a vacation or splurge on yourself
Obviously, paying down your credit card debt with your tax refund is a good idea. Credit cards accrue interest that is not tax deductible. This means that if you can only afford to make the minimum payments you will end up paying dearly down the road. With interest rates on the rise due to the economy, it would be smarter to try to pay off your cards completely as soon as possible.
This is why using your tax refund to pay off your credit cards is such a good idea. While you probably won’t be able to clear the whole balance, you might just be able to put a significant enough dent in it that the interest won’t hit you as hard. Hopefully, this makes things a little easier.
Make an Extra Loan or Car Payment
Much like paying down your credit card debt, it is always a good idea to get ahead of your substantial liabilities to reduce the amount of interest you have to pay. While one payment every now and then probably won’t greatly affect the life of your loan, you may notice a steep decrease in the amount of interest that accrues. Of course, the result is that you will indeed pay less in the end; it just won’t feel as immediate as with a smaller account.
Start an Emergency Fund
Life can be and often is unpredictable. You never know what unexpected turn you might take. You get a flat tire or lose your job, you could be struck with an illness or have to make a sudden trip out of state to care for an ailing family member.
When these emergencies arise it is too late to gather the money you need. Instead, you should plan ahead and try to stockpile a little money for a rainy day, as they say. Of course, month to month this is not necessarily easy to do, but one substantial tax return could be more than enough to find yourself a little less stressed should an emergency come your way.
Much like auto insurance which pays for a car rental and shop repairs should you get into an accident, an emergency fund gives you a little extra breathing room during less than favorable times. At the same time, a savings account with a healthy deposit can also accrue a little interest too.
Plan a Vacation or Splurge on Yourself
You work hard for your money and your personal time is very valuable. However, it isn’t always easy or affordable to take a vacation on a whim or even to treat yourself to a night on the town. Instead of trying to make ends meet and put money away, you could simply take your tax return and save it for a special occasion.
Indeed many people use their tax return in this way: to take a family vacation or have a romantic night out with their significant other. Maybe you want a new car or a high-definition television or something related to your favorite hobby. Perhaps you are thinking of remodeling your home. While your latest tax return might not be able to pay for all of it, it could get you closer to your ultimate goal.
You can use your tax refund for many things. While many people would probably say that you should spend it, there are other investments, like paying off your credit cards, that you could make that could provide a bigger return in the future.