tax refund spending dos and donts
Tax Refund Spending Dos and Don'ts
Contrary to what others say, a tax refund should never be treated as 'free money' or a 'bonus'. It is your money, and you can do whatever you want with it, however, if you chose to spend it wisely, you can definitely reap the benefits in the longer run.
You know if the U.S. Government wanted to boost the economy there's a simple solution make Black Friday the refund date for your state and federal taxes.
A tax refund is the return of the excess taxes that a taxpayer had paid the federal or state government during a calendar year. In certain instances, taxpayers are viable to receive a tax refund even if they owed no taxes. This happens because of certain tax credits being fully refundable.
The average tax refund rate for 2012 was $2803, that is almost $110 less than what was paid in 2011. Looking at the dire state of the economy, financial experts believe that the returns for next year might be even lower.
If you are a part of the American tax-filing society that is about to get a tax refund, have you thought on what are you going to do with it? Planning to go on a vacation, thinking of buying a new gadget, or paying the advance for a new car? Financial experts say that most people take tax refunds as found money, and often spend on things they want, not need. However, before you make any regretful decisions with the money, here are certain dos and don'ts that can guide you to spend your refund in a smarter way.
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$$ How to Spend your Tax Refund Wisely $$
Minimize Major Debt
First of all, if you have any major debt or balance on your credit card, pay that off with the refund. According to data generated by Federal Reserve, Americans owe more than $800 billion in debt, and most of it is on credit cards. The best thing to do is to tackle high-interest debt first; this will help you to save lots of interest money. For example: if you are carrying a credit card debt of almost $4000, then you are paying an interest of almost $700 to $1000 every year. Just clear the card debt, and think of all the interest money you'll save.
Pay Mortgage
If you don't have major credit card debt, then the best thing to do is to pay off your mortgage. By contributing extra money to the mortgage payment, you can significantly reduce the interest rate. Even with the present low interest rates, the total amount of the mortgage can be quite heavy. By paying the mortgage early, you can significantly reduce the interest amount you'll pay over time.
Save for Retirement
The economy is still turbulent, and you really need to give some serious thought about saving for retirement. If you really don't have much credit card or mortgage debt, then set aside the tax refund for an emergency, or divert it to your retirement savings. Also, putting this money in the traditional IRA or 401(k) makes you eligible for a tax break on the tax refund as an added bonus. Saving some money today will definitely reap you benefits for the long term.
Invest in Yourself
The next best way to spend your tax refund is to invest in yourself. Take up a new skill or start brushing up the one you had. Start inquiring about new courses, or complete the one which you left in the middle. You can also go for advanced degrees, attend night school, or adult-education centers that offer a vast range of specialized courses from photography to cooking. Even evening business classes may prove quite useful, and might give you an insight about the corporate world.
Treat Yourself
In the end it is your money, and really there is no fun to spend it all on clearing bills or saving up for investments. It is perfectly fine to spend it on leisure activities, but don't overdo it. Pick something like 15-20% for doing something fun, but then it is essential to be responsible with the rest of the tax refund. That remaining amount can be used for all the above investment strategies.
$$ How Not to Spend your Tax Refund $$
Electronics
It may feel like fate that your favorite iPad, HDTV, or laptop goes on sale the same day you receive your tax refund. You couldn't afford these items before, but now that the refund has been received, you don't want to miss this opportunity. Here's the thing - electronics are always on sale at some place or the other, and while you might get carried away in the spur-of-the-moment, the regret later is going to be painful.
Gambling
Never forget that tax refund is your money returned to you by the government, so just don't go rushing to casinos in hopes of doubling it. Gambling is a dangerous game, and there's like a 1 in 100 chance of you winning. Try to resist the urge of blowing up the entire tax refund in one night.
Vacation
We all definitely need some time away from work, but using the entire refund money as a getaway is certainly not a wise decision. Also, if you are not in a position to go for a vacation without the refund, then you really need to think twice before taking such a vacation. Think of a vacation if you have some extra cash to spare, but never think of using a tax refund as a means to enjoy a luxurious holiday.
Celebration
Getting your money back from the government definitely calls for a celebration, but that shouldn't happen by spending the refund on booze and food. Sure, you and your friends will definitely enjoy the potent booze, but in the morning a much more potent emotion will hit the head - remorse.
New Car
Don't go hitting car dealerships just because you've got an added bonus. Owning a car is really expensive, and don't forget the expenses on gas, maintenance, and insurance premiums. If you really need to get a new car, and it is really becoming difficult to rely on others for transportation, then and only then should you use the refund money to buy a car.
Spending your tax refund carelessly is synonymous to not receiving any money at all. Hence, it is perfectly understandable to have a little fun with that money, but some part of it should definitely be used in creating other sources of income in the long run.