5 Productive Ways to Spend Your Tax Refund
With April 15th less than a month away meaning tax season is coming to an end. We know how tempting it will be to put that tax money towards a new set of golf clubs or that purse you’ve always wanted. I mean that’s cooler than putting money in a savings account right? Contrary to popular belief we actually agree, but (there is always a but) once more important things are taken care of. Here is a list of some of the ways you can spend your tax return money.
Pay Down Some Debt
Tax season is the best time to pay off debt. The thing that often causes debt to accumulate is the inability to pay off large portions at a time. Unfortunately, debt isn’t the only expense most people have at one time. A combination of debt and cost of living expenses can leave very little wiggle room in your budget. Using your tax refund to pay off any outstanding balances on your credit cards or student loans is one easy to way to get ahead of your debt. An easy way to categorize your debt is to figure out which expense needs your financial attention first. There are two main methods you can use to categorize and pay off your debt.
The snowball method is relatively self-explanatory. The idea is that you pay off smaller debt first and “snowball” your way to the larger debts. Starting with the debts that have the smallest balances allows you to pay off more than one debt at a time (depending on how large your smallest balance is). The biggest benefit of the debt snowball method is that you can see immediate results while building momentum to tackle the larger debts.
The idea of the debt avalanche method is to start from the top with the largest debt (or, the one with the highest interest rate) and work your way down to the smallest debt (or, the one with the lowest interest rate). This method shows slower results but is more effective because you are paying off the most damaging debt. With high-interest debt, your expenses accumulate faster, so if you have high-interest debt, the avalanche method might be the method for you.
Pick the method that works for you and start paying off your debt! Remember, at the end of the day paying off SOME debt is always better than not paying off any at all.
I am a big advocate of having an emergency fund (if you couldn’t already tell by any of my previous newsletters) mainly because I know how crucial it can be in a time of emergency (go figure).
Seeing the value of an emergency fund only comes in time of emergencies, so putting a substantial amount of money aside for something that might not even happen can be hard to justify for some. For the individuals that feel this way, I would like you to ask yourself: if my car broke down right now, would I be able to afford to fix it without having to allocate money from another part of my budget?
For the majority of you the answer would be no (those that answered yes, might be able to skim past this section because it might not apply to you). The simple truth is that putting money aside for emergencies will give you the safety net you need should an emergency happen. If you haven’t started an emergency fund now is the perfect time! Keeping the theme consistent, remember that SOME is ALWAYS better than none.
Prepay Your Bills
If you have already contributed some of your tax refund to either of the first two options and still have some money left over you might want to look into prepaying some of your bills. Prepaying your bills with your tax refund will give you more room in your budget to do other things like pay off debt or put some money in savings.
An easy way to manage your bills is to set up a checking account with automatic payments for large bills such as your mortgage, rent or car payment. Setting up auto bill pay will allow you to figure out how much of your tax refund you can afford to put towards future bills. Having all your bills set on auto-pay will give you the security of not missing any payments.
Does your house need some renovations? Use your tax refund to make improvements in your home, such as installing energy efficient windows, upgrading your appliances, or doing some remodeling. Often, home improvements get put off to the side because there are other expenses that are more important. If you have some extra money from your tax refund, put it into your home!
Treat Yo’ Self
Following the sage advice of Parks and Recreation characters, Tom and Donna, use your tax refund to treat yourself. Indulge in a spa day, buy a new laptop or take a mini-vacation. It’s important to remember to spoil yourself occasionally. After all you’ve worked hard for that money, might as well reward yourself with something nice every once in a while. Don’t let the frugal life discourage you, there is still room for some self-indulgence.
Looking for more 2015 tax information?
Go no further! We have supplied a link for some of our favorite tax-related articles. Here you’ll be able to find all the information you could need from 2015 tax changes to the best tax software to use! Enjoy!