Planning For Your Tax Refund
2/2/2020
For many Americans, tax season is a time when one can expect some extra dollars in their pocket! But before spending any of that money, you first should consider how it will best benefit you. Take some time to think about your current financial situation as well as your short and long term financial needs and wants.
Ask yourself these questions:
Do you have an emergency savings?
It is recommended to have at least 3 to 6 months of expenses saved in an emergency fund. If you do not have a comfortable amount saved, it is a good idea to stash that income tax refund into an emergency saving account. Since it is often impossible to predict unexpected events, having money “just in case” will provide a comforting sense of financial security.
Do you have balances on your credit cards?
If your emergency fund is already well established, but you still have some lingering credit card debt, get rid of it! Remember, if you do this, you do not want to accumulate new debt. It is a better strategy to use your debit card and a credit card only for expenses you know you can pay off in full. Many people fall into the trap of building debt over the year and then paying it off with their tax refund, but with interest on your debt, you're losing money. If you maintain and stick with a realistic budget and savings plan, you will have no need for credit cards and be much better off.
Do you have a want or need that comes with big price tag?
Start saving for it! Perhaps you are in need of a new car, home upgrade or exciting vacation. Whatever it may be, saving for it will reduce or eliminate the amount of debt that may be attached to that big expense. Planning ahead is always a good idea when it comes to your finances.
Read more: The Earned Income Tax Credit: What Is It And Who Qualifies?
Do you feel confident in your financial future?
No matter what your age is, you should be planning for your retirement. Experts recommend a savings goal of 10% to 15% of your pretax income. If you feel you're lagging behind in your retirement planning, consider putting your refund into a retirement savings account, such as an IRA. If you have children, there's a strong possibility that you will have college expenses in the future. Starting up a college savings fund, such as a 529 B plan, will save you money later.
Would the extra cash serve you better year-round?
If you tend to get a large tax refund, you're likely overpaying on your taxes throughout the year. You may want to consider adjusting your withholdings on your W-4, which will result in more money each paycheck. If you feel uncertain about how to make these changes, it is advisable to speak with a trusted tax professional, as you do not want to end up owing the IRS next year.
Lauren Lovett has been with Navicore Solutions for over 15 years serving as a Certified Credit Counselor, and currently as the Director of Grant Development. While in these roles, she has witnessed the positive impact that the organization’s counseling services has on improving the money management skills and housing security of individuals and families in need.