This has a lot to do with how you pay your taxes. Normally, people have gotten used to receiving a big tax refund check for overpaying their taxes. This has been a big boost to a lot of people’s finances and they expect to receive it every year. Though the amount changes year on year, a lot of consumers already has a pretty good idea how much they are getting. What if you reversed the process?
Rather than overpaying Uncle Sam, you pay the right amount of taxes so you either get a smaller refund or none at all. It would require a lot more work and due diligence on your part to make it happen. You might even have to work with a tax professional to make this happen. However, if you go down this route, this simply means you get some extra money every month.
There are times when you stumble on extra money and it can make your whole day. You might find it in one of your pockets, under the couch, or even somewhere in your drawer. Getting your hands on some money you did not expect might sometimes be a lifeline. This happens in cases where you are going through some really tough time. That being said, what if you can make a few changes and get that extra fund?
Rather than overpaying your taxes and letting that money sleep interest-free with the government, you get hold of the money upfront. Once you get to that point, the next question is what do you do with the money now? You have anywhere between $30 to over $100 every month in your budget. If you want to make the most of it, here are a few things you can do.
Pay down high-interest debt payments
If you have that extra money in your budget, one thing you can do is apply it towards your high-interest debt payment. There is a good chance that these are your credit card debt you have accrued over a period off time. You could be charging one purchase at a time and before you know it, your total payment has ballooned into a big one.
Once this happens, there are people who would opt to just make the minimum payment. They are small amounts and would not interfere that much in their budget and finances. However, what they do not realize is that minimum payment costs more over time. They will be paying a lot more interest throughout the life of the payment.
This is why having extra money every month can be a big help in keeping your credit card debt under control. You can put extra funds to help you be a bit more aggressive with your payments. If you think about it, doing this can help you save money down the road. The interest payment could go down and you can save that money into other accounts as well. Not to mention that on-time credit card payments can help you improve your credit score as well.
Strengthen your reserve fund
CBS shares that about 57% of Americans would not have enough cash to manage a $500 unexpected expense. This is troubling since emergencies happen when you least expect it. They can often catch you off-guard and do some real damage when you are not financially prepared. The only way to go about it is start saving for emergencies.
The extra money you get from filing your taxes accordingly can help you reach your emergency goal target. You can choose to automatically transfer a specific amount to your emergency account every month. Doing this will help take away the time you have to spend transferring or putting the money into your emergency fund.
The bigger your reserve fund is, the lower your financial stress can be. This is because at the back of your mind, you could constantly be worrying about your finances. You worry that you do not have enough in the bank when disaster strikes. When you have a strong emergency fund, you know that you have some funds you can use which lowers down your stress.
Put it towards your retirement money
There are a lot of retirement problems people experience and one of them is not planning for it as soon as they can. They believe that retirement is still too far off in the future and that they can start planning for it some other time. Once this mindset gets traction, it will not be long when you start stressing out about not having enough in your nest egg to support your retirement years.
As you plan for your retirement, it is a good idea to be aggressive with it. One thing you can do is use your extra money from filing your taxes right every month and maxing out your 401k. There are also other IRA accounts you can use to help you plan for retirement. Another option you have is considering investments as part of your retirement mix.
The more aggressive you are in saving for retirement, the more your savings can work in your favor. A lot has to do with compound interest. The more you have and the longer you let them earn interest, the bigger your fund gets. This is why putting extra funds in your retirement money works to your advantage. You might even be able to retire earlier than you have planned.
Save the extra money for your children’s cost of attendance
Another great use of that extra funds you get when filing your taxes correctly is saving for your children’s college costs. Forbes shares that the student loan debt has reached $1.5 trillion share by 44 million borrowers. What is more troubling is that student loan is already bigger than credit cards and auto loan debt combined!
This is why using that extra fund you have to plan for your child’s college expenses makes a lot of sense. You might argue that student loans can be repaid easily but you have to understand that it takes a long time. If you help them save money to pay a portion of their cost of attendance, you help them have an easier time paying back their loans. This gives them a better chance of starting on a good financial footing.
One thing this brings to the table as well is that it lessens the chances your child would come up to you to ask for college money. This can be a straight request for money or even cosigning a private student loan. They do this because they have a better chance of being approved. They also get to use your good credit standing and pay less interest on the loan. Remember that if they default on that payment, your score dips and you are responsible for paying the lender back.
It pays to file your taxes correctly and have that extra money upfront rather than getting it in the form of a tax refund check. One of the reasons for this is that you get the chance to use the money earlier in strengthening your finances.