Tax season is here, and so are tax returns. If you filed income taxes, you might be waiting for that check in the mail, thinking about what to buy. I hate to burst your bubble but tax refunds aren’t gifts so much as money you’ve lent to the federal government over the last year, interest-free. Here’s what to do with the refund you’re awaiting, and how to keep that money in your paycheck (and pocket) next year.
According to the IRS, nearly 78 million people got federal tax refunds in 2009 averaging $2,705. Lots of people think of their refunds as a bonus and even adjust their W4 forms to make sure they get one. Remember, if you fill out your W4 forms with the goal of breaking even, you’ll get more money in each paycheck. That’s cash that can work for you throughout the year — whether helping you pay off debt or earning you interest in a savings account.
Refund already on the way? Before heading to the mall, consider this: what you have is a golden opportunity to get on better financial footing. Here’s how:
1. Pare Down Debt
The more you knock out now, the less interest you’ll pay in the long run. If you have a $2,000 credit card balance with an 18 percent interest rate and you’re making payments of $80 a month, it’ll take you 32 months and cost you an extra $526 in interest. Double that payment to $160 and it’ll take you 14 months to pay off and cost you $295 in interest. That’s a big difference. For more tips on wiping out debt, click here.
2. Soup up your Savings
If you don’t have debt, you’re on the right track. But it’s also important to build savings in case of an emergency or job loss. Think of it this way: clothes, music, and electronics will probably be long gone in a few months or years. But getting into a good position financially will bring you peace of mind and set you up to afford more for years to come. Money in savings also accrues interest. Find out more about the benefits of saving here. Some banks and credit unions offer checking accounts with some restrictions and higher interest rates. Shop the options.
What should you do to make sure fewer of your taxes are withheld next year? Talk to your employer and adjust the exemptions on your W-4 to get little or no refund. You should notice a fatter paycheck within the next few pay periods.
Using your tax refund wisely can help you bring down debt and build wealth, meanwhile boosting your credit score. For more on debt, credit and why it’s important to maintain a good credit score, check out WhatsMyScore.org.
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