• How to put your Tax Refund to good use

    With the tax season upon us, it is time to think how you will use the rebate. A tax refund is the refund you get when the tax paid is more than the tax liability. In fact, in the US, the average tax refund check is worth more than a month’s income for 2 out of 3 taxpayers. With such substantial amount of money bound your way, you may start thinking about how to utilize it. Personally, I like to suggest the following two as the ideal use of tax refund:

    Pay off debt

    While paying off debts, you need to be very organized. First of all, prioritize your debts. Different financial experts are of different opinion. Some advise you to pay off the smallest debts first and making nominal payments on the rest. When the smallest debt is paid off, the amount that you put down for this debt is allotted for the next smallest debt. This is called the “Debt Snowball” trick. Others suggest that it is best to pay off the debts that charge the highest interest rates and then move on to debts of lower interest rates.

    Pay off your credit card debt with a portion of your tax refund because credit cards usually have the highest interest rates. To minimize credit card debt, it is also wise to choose a card that charges low interest rates or has a low interest option for purchases. You can also put down a large payment on your mortgage with the tax refund. This hefty payment will reduce your interest cost over the years.

    Top up your savings account

    Saving up is another good way of putting your tax refund to good use. You can save up for your retirement, for your child’s education or for emergencies. Adding your tax refund to a Tax-Free Savings Account is a clever way of letting your money grow without tax payment biting into it. Once you have set aside your retirement fund and build your nest egg, it’s better to start saving for your child’s education. In this respect, contribute your tax refund to a 529 or Coverdell Education Savings Account. These earnings, though, are subject to tax and penalties are charged for unqualified expenses.

    Although it is claimed that your emergency fund should consist of at least three to six months’ necessary expenses, most employees save up much less than that, if at all, for emergency purposes. An emergency could come in any form- you may be laid down or you may face some injury that can keep you away from work for prolonged time. So, it is a wise choice to put your tax refund in your emergency savings account to cope with such situations.

    It is important to strike a balance between the two; it is you who will determine what portion of your tax refund should be allotted to pay off debt and the rest will go into your savings account. General financial advice must be modified before putting to personal use, so use your sound judgment or seek professional financial help to manage your tax refund.

    My Financial Corner can find the best solution. Call us now and let us help you!

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