A lot of people are waiting to get a tax refund year after year because it helps give their finances a boost. You do not know when it is coming but you can estimate depending on the date you filed for it. On top of that, you can only guess the exact amount you are getting because it can change from year to year. That is if you are even receiving a refund on your tax payments.
Most people prefer overpaying and receiving a refund after rather than shortchanging the government on tax payments. This is because the latter can lead to penalties that can make it a lot harder for you. Not only will you have to make up for whatever you did not pay, but you could also be slapped with recurring fees until you pay your taxes correctly.
This is one of the reasons why people choose to look the other way and pay more than what they should every year. This is because people believe that it is better to receive a tax refund than being slapped with a penalty. There are some people who view this as a waste of money because they are essentially giving the government an interest-free loan.
USA Today shares that the average refund in 2019 was about $2,725. This is already a considerable sum for most people. The challenge lies in how you use it to further strengthen your finances. There are actually instances where you might receive a hefty sum but you end up doing more damage to your finances. If you want to look at some of the ways you can use your refund for good, here are some of them worth looking into.
Pay down high-interest debt obligations
Once you receive your tax refund, you could be tempted to start spending it to buy your heart’s desire. This is because the money you receive from the government is not plugged into any aspect of your household budget. It is also not allocated for any type of savings you have planned for the entire year. This essentially means the refund is windfall money at your disposal.
When you come to this realization, that dress or new pair of shoes you have been looking at seem quite affordable. The smartphone you wanted to buy because it recently came out is now within your budget’s reach. Giving in to these could no doubt provide an instant high but it will certainly not last that long. Once it ends, regret usually follows after where you wish you made a sounder financial decision.
One of the best ways to use your refund is to lower down your debt-equity and pay down high-interest obligations. This is normally in the form of credit card debt but you might have other types of high-interest loans. One of them could be a payday loan you used in the past to get you out of a financial emergency. It would be a big financial relief if you can pay off these obligations or at the very least, pay then down significantly. It can free up a big part of your budget where you can reallocate them to better use.
Increase your reserve fund
Once your tax refund comes in for the year, one option you have is to put everything or a big part of it towards your reserve funds. This covers both your emergency fund as well as your rainy day fund. A rainy day fund is meant to help you cover for the smaller needs you encounter from time to time. It also helps you keep your emergency fund intact when you come across life-changing emergencies.
These types can be medical needs ranging from being confined in the hospital for a few days or even needing a surgical procedure. Your emergency fund should also be strong enough to cover all your basic needs in case you find yourself in between two jobs. This is challenging because the time in between varies from a few days to months.
Your emergency fund needs to be able to pay for all your basic expenses so you can focus on finding a new job. There might also be times when you choose to seriously pursue a side gig in hopes of turning it into your main source of income. Your reserve fund can help ensure that you have enough to pay for basic needs in case things do not turn out the way you planned them to be.
Pull your retirement date closer
Your tax refund could pale in comparison with the amount you need for retirement. Gallup shares that the average retirement age is about 62 years old. You might not even think twice about using it to help you save for your golden years because it would barely make a dent. You need six to seven figures when the times come that you retire and rely on your savings and your refund is just too small to make a difference.
However, you need to understand that one important component of your retirement fund planning is compound interest. This is one of the main reasons why your money grows the way it does over the years of your savings for retirement. As you save and put away money in investments, the interest keeps on adding up allowing your money to grow.
This is the reason why you save as early and as much as you can because compound interest grows over time. It is also the reason why it does not matter if you can only add a small amount to your fund because it will help your nest egg grow over time. Add as much as you can and see your retirement date pull closer and closer.
Fund an income-positive hobby
Your tax refund can actually help you earn more money if you put it in the right places. One of these is an income-positive hobby. This is where you spend time and effort in your hobbies not only to be able to do the things you love but earn some extra cash on the side as well. This is gaining popularity with people since it affords them the luxury of extra cash and loving the work as well.
If you love to bake for family and friends, you can use the money to upgrade your kitchen or even buy the cooking appliance you need to help you produce more. You can then start selling your baked creations online to reach more people. If you are a creative person, explore the possibility of using the money to help you get the computer you need to accommodate commercial jobs.
It is also possible that you love to take photos and you could be quite good at it too. You can offer your services to family and friends first but you would need better equipment to do the job. Try and use your refund money to help you fund an upgrade of your current setup to help you capture photos better. Once you use your money for these needs, you can start earning more as the year goes by.
Spend your tax refund to save more money
Spending money to be able to save money might be a confusing concept but it actually makes sense. Think of replacing inefficient appliances at home and upgrade to more energy-efficient brands. Yes, you need to buy new items but they will help you save money along the way. You could see your electricity bill go down.
The same goes for pipes that need replacement to address potential leaks and breakage. You can also use the money to have your car checked to give you the chance to get ahead of major repairs. Preventive maintenance is a lot better than costly repairs.
Invest in personal growth
There are also times when you can use your tax refund money and invest in your personal growth. Look at the skills you have and use at work and see if there are ways to improve them. It could be classes you can take to help you learn more. There could be times where you need to gain more experience with a trip or a workshop to give you that edge you need.
There is no question that receiving a tax refund early in the year can help you improve your financial standing but only if you know how to use it. If not, this amount might even be detrimental to your finances.