Best uses for large tax returns
Who doesn't like receiving a large tax return each year? April 15th is the tax filing deadline and as it gets closer many people will be anxious to see what kind of refund they will get. It's a nice surprise when you get back a large sum of the money you paid in taxes during the year. It's also a great opportunity to make some great financial decisions that will help your situation now and in the future.
So when getting that large check in the mail, why is the first thing we thing of doing is spending it? Why do we automatically think, time for a vacation or time to buy new clothes? We work hard for our money and when that unexpected check comes in the mail we quickly think of how we can reward ourselves by spending it on something fun and new. When you receive your next large tax return, think twice before you run out and spend it. Here are the best uses for large tax returns:
Debt
One of the best uses for your large tax returns is paying off debt. Debt is always such a headache and we seem to always accumulate it, especially on those high interest credit cards. Consider paying off that high interest faster. The average credit card debt takes 30+ years to pay off when paying the minimum payment. The more debt you can knock off now, the less you'll have to pay in interest charges later. If you don't ever lower your debt, then you will always be paying on it and you will waste a large amount of money just on interest alone.
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Invest
Investing your money is probably one of the most important uses for your large tax return. Investing will ensure that your money gets a better rate of return than sitting in the bank where there is little or no return on your money at all. If your money is just sitting there, why not have it working for you? This is one sure way that you are setting up for your retirement. Look at your long term savings goals. If you have children, you can also fund a college savings account. Make sure to research and consult a licensed investor before putting your money in just any investment. Also check to make sure you are getting the best rate of return you possibly can on your money.
Save for the future
It's always good to have cash ready when you need it. Use your extra money to build up your cash reserve. Have money set aside for things like a down payment for a house or for starting a small business. This is a great way to use your money, plus you also get added tax breaks.
Emergency account
It's a good idea to set aside some money to cover unexpected emergencies, such as loss of a job, an injury or hospitalization or another unforeseen crisis. The average person should have enough cash to cover at least half a year to a year worth of living expenses to handle emergencies.
Many people who get large refunds are doing so because they're having their employers take out too much each month toward their taxes. This essentially gives the government a free loan to use the money how they wish until it's refunded. The government invests your money and then gives you just what they owe you, not the interest they have gained.
It is important to remember that receiving a large tax refund is not necessarily a good thing. It may be fun to get that lump sum at the end of the year, but there are better ways to work with your money. Rather than allowing the government to hold onto your money the whole year and pay you nothing in the gained interest, you should work with your financial advisor or accountant to adjust your withholdings so that you receive a small refund after you file your return. This will allow you to free up more cash flow throughout the year to invest or pay off your debt. Plus, you will be receiving all the interest gained on your money instead of the government.
Remember the best use for large tax returns is to reward your hard work by saving up for the future. You won't be sorry that you did. Doing this year by year may actually even help you retire faster or get into that house quicker. Be smart with your tax returns and your money and you will be financially ahead of the rest!
