Tax refund mistakes are fast becoming a topic for a lot of people soon after they send in their tax payments for the year.
For a lot of people, getting a tax refund is a pleasant surprise. Some expect to get a refund just as they have received one every year. Others don’t mind if they get one or not. However, getting money straight into your account as a refund for the taxes you overpaid is still a great financial windfall.
According to CNBC, the average refund amount Americans could get this year is around $3,140. Though it is a bit lower compared to previous years, this is still a big amount of money you still need to budget for. It can still make a big impact on your finances. But that is if you play it smart and make sure you make the most out of the refund.
Not having a household budget
It mIght be challenging to try and look for the connection between tax refund mistakes and having a budget at home. But the reality and the beauty of a household budget is that it allows you to make informed money decisions at any given time. This flexibility will give you the chance to know the best way to use your refund.
In the same way that you will also be having a difficult time putting your tax refund to good use without the help of a household budget. For one thing, your budget lets you know how many payments you need to make every month. It also shows you exactly how much income you have to pay for those expenses. Even your savings should be reflected in your budget.
With all that information, you can better understand where you can put your refund. Will it be better if you put a part of your refund into credit card payments? Could you use it to cover rent for the month as well? Will your retirement fund have better use for the money? All these and more can be answered if you have a working household budget.
Tax refund mistakes can mean spending everything on wants
Many Americans still struggle to put a line between their wants and needs. This is one of the challenges you need to overcome if you want to make the most out of your tax refund. The goal is to use the money in a way that will benefit your finances. And if you suddenly give in to your wants and start spending the amount you get left and right, that money will go by so fast.
And it does not always follow that because it is a necessity, you can spend whatever amount you want. Take food expenses, for example, you need to eat every day but does it include expensive takeout? Or ordering in every single day for food? This can be too costly and it would be better and more economical to cook your food.
It helps to practice restraint especially if you are dealing with some extra money you did not know you were going to have. Rather than using everything in one go, stick to your needs and find a way to help you improve your finances with it.
Lending the amount to family and friends
One of the tax refund mistakes a lot of people do is lending the entire amount they get over to family and friends. There is nothing wrong with helping people around you, especially the ones that matter to you greatly. But there are other ways you can help without giving all your tax refund money away in one go.
There are instances when spending time with people who need help works as well. Sometimes, they just need a person to stay and listen to them. At times, you just have to be with them and comfort them in silence. Of course, if they ask for it, words of encouragement or pieces of advice might be the way to go. It does not always have to be about money.
But if it is, then lend an amount you can afford to lose. This is one way to help you keep the relationship in case they are unable to pay you back. When that happens, it will not be that difficult for you to let the issue go and continue with the relationship. Of course, you just need to learn from the experience when they borrow again in the future.
Putting the whole amount in a high-risk investment
Investing your money so you can enjoy the income it provides you in the future is always a good piece of money advice. This is one of the ways a lot of Americans plan for their future. It could be for retirement, a prospective business, or even securing their family’s future needs. Investing the money you have now is always a good part of a financial strategy.
But one of the tax refund mistakes most people make especially when it comes to investing is going all in. And not only that, they choose the riskiest type simply because the tax refund amount they got is money they did not even expect. This is tempting but you can also stand to lose that amount if your investment does not pan out.
You can definitely invest your tax refund but be cautious about where you put it. It is also not wise to put everything in one basket so dividing that amount up into several investments could be an option. You can put some towards investments, others towards paying down debt, and you can even set aside an amount to lend to family and friends in need.
What to do as soon as you get your tax refund?
More than just trying to stay away from tax refund mistakes this time of the year, it is also a good idea to focus on positive things to do with it. The IRS mentioned that Americans will get their refund early if they chose direct deposit and they have no issues with their tax return. Here are things you can focus on when you get your tax refund.
- Set it aside – You can choose to set the money aside and save it for future needs. It can be for your retirement fund when you reach your golden years. The more you save now, the more compound interest could work in your favor. The health crisis could have made you realize the importance of having an emergency fund. You can also set your tax refund aside for that.
- Look at your priorities – If your goal is to save up for a downpayment on a house, then a good portion of the money could go to that fund because it is a priority. If you want to go on a vacation at the end of the year, then you can use your tax refund for that because it is a priority. The goal is to look at what you want to achieve and use the money for that.
- Use only what you need – No one ever said you need to use the whole amount in one go. You can use a part of it and set some aside. This boils down to your goals and financial priorities.
Numerous tax refund mistakes can derail you and you have to be on the lookout and avoid these. Your tax refund should be able to help you get closer to your goals and not push you further away from them.