You hear it all of the time; you know the talk that starts sometime in January. It is an endless list of things that people are going to buy with their tax return. The list is so long that they are either going to receive a quarter of a million or will have to parse that list considerably. When was the last time you heard someone plan to spend their return on something that will actually make their personal finances better in the year or years to come? Here are a few quick ideas that you may want to consider for your tax return this year.
Credit Card Debt
This is an easy target for sure. Granted, for most people spending a large check on credit card debt is the anti-thesis of fun. I am not advocating taking all the fun out of that big check, so why not pay off ten percent of your credit card debt? Say you owe ten grand in total. Paying off ten percent or $1,000 will save you around $100 in interest in a single year. Additionally, your credit score will improve based on a lower debt/credit ratio which accounts for 30 percent of your score.
If the refund you are expecting is large enough, why not pay an additional mortgage payment when it arrives. One additional payment per year can shave three years off a 30-year note, saving you thousands of dollars in interest.
Non-traditional credit means different things to different people. To me it means items like payday loans, title loans, or rent-to-own contracts for furniture, electronics, etc. If you are expecting a large refund, you should get out from under any payday or title loans that you have. Those loans are burdensome and are intended to keep you borrowing for at least a year if not your lifetime. Next, look at those rent-to-own arrangements. If you have been paying on the contract for a long time, pay it off. If it is a new rental agreement, send it back and buy the item from a retailer. The products at rent-to-own stores are usually going to cost you double their retail price if you pay over the entire term of the contract.
Job loss, death, and divorce do not care how ill prepared you are. Anyone of them can rear its ugly head at any time. You need an emergency fund to soften the financial blow that they can bring. Bonuses and tax returns represent the best opportunities to pad those accounts without sacrificing anything in your budget. I would recommend that you deposit ten to fifteen percent of you return into your savings account. If that is not appealing, try choosing one of your recurring monthly bills. Put that amount into savings.
At no time did I advocate saving your entire refund. Everyone needs to blow off a little steam. By all means, go out, buy yourself something that you normally wouldn’t. Splurge a little, just do so after carefully considering ways to lighten your burden heading deeper into the new year.
What do you plan to use your tax refund on?