The Right Way to Spend Your Tax Refund

In 2015, the average tax refund was greater than $3,000. For some people, being handed that amount of money in a lump sum creates a challenge. Typically, the first reaction is to start spending on “things” without really giving much thought to the process. Within a short amount of time, the money is gone and the individual is left with items that make little sense.

Although you might be tempted to spend your tax refund immediately upon receiving the money, this is the perfect opportunity to analyze your financial situation carefully so that you avoid common spending mistakes.

Mishandling of Tax Money

By understanding the most common mistakes made with tax money, you can make better financial decisions.

  • Frivolous Purchases – For some reason, some people have the mindset that tax money should be used to purchase items that would otherwise never be bought. In reality, your tax refund should work for you, not the other way around. For example, rather than make frivolous purchases, consider investing the money for retirement. Through credit counseling or by talking to a Binghamtom financial advisor, you can learn about different options. A prime example: If you put a $3,000 tax refund into an IRA, which offers a 10 percent return, every year for 20 years, the money will grow to $180,000. You might also use the money for short-term gains, such as taking the vacation of a lifetime or setting yourself up for an even bigger return next year with a tax break by making your home more energy efficient.
  • Never Ignore Debt – Using your tax refund to pay down or off debt is certainly not exciting, but long term, it is highly beneficial. Depending on your situation, unless you get your debt under control, you could find yourself needing a good Binghamtom bankruptcy lawyer for a Chapter 7 or Chapter 13 bankruptcy.
  • Avoid Building More Debt – By using your tax money on new debt, you will likely find yourself in a serious financial situation. For instance, if you were to use the money as a down payment on a new car that barely fits your budget, you would end up with additional monthly debt that you cannot afford.
  • Never Use Tax Money to Conquer Debt – While that might seem contradictory to an earlier recommendation, there is a difference in using money to pay off debt versus constantly chasing bills. In other words, if the tax refund pays off one or two bills, great, but if you need the money to pay off debt because your lifestyle consists of overspending, there is a problem. In this case, you need to make appropriate lifestyle changes or perhaps consider debt consolidation. The goal is to live within your means.

In reality, your tax refund can help improve your finances only if it is used appropriately. Even if you are tempted, avoid spending the money right away. Instead, take the time to review your debt, goals, and long-term needs to get the most benefit from the tax money.

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