This is the time of year that many people live for – tax season. And while people who owe may delay filing until the last minute, those who anticipate a refund may run to their tax preparers office. Getting a refund is a big deal, especially if you live paycheck to paycheck. With little cash throughout the year, a tax refund may be your only chance to catch up on the latest fashions, take a getaway or simply squander your money on nonessentials. Who wouldn’t jump at the opportunity to spend money on whatever they pleased? But since lump sum payments are few and far between, there are better uses for your cash. Stop the cycle of wasteful spending. Here are six smart things to do with your tax refund this year.
1. Eliminate your credit card debt.
Credit card debt doesn’t go away by itself, and if you’re waiting on a pile of cash to fall into your lap, your tax refund can be the answer to your prayers. Even if you don’t receive enough to eliminate your balances completely, your refund can knock your balances down and jump start your pay off efforts. Plus, the less you owe on your credit cards, the higher your FICO score.
If there isn’t enough cash to go around, pay down your credit cards with the highest interest rates first. For credit health, keep balances less than 30% of your credit limit.
2. Replenish your savings account.
Maybe a financial emergency during the year took a chunk of your personal savings. Then again, you may not have a savings account. Of all the smart things to do with your tax refund, saving should be at the top of your list. Some people don’t think about saving until they’re caught in the middle of a financial crisis. Everyone earns differently, and whereas one person can comfortable stash 10% of his pay each month, another person may not have the extra income. Save your tax refund and you’ll build an overnight cushion.
3. Start planning for a house.
With mortgage lenders requiring at least a 5% down payment, you might cancel your plans of buying a house. But don’t let this financial requirement stand in your way. Your tax refund can put you a step closer to ownership. How so?
Let’s say you purchase a $150,000 house. In this case, you’ll need approximately $7,500 for a down payment. With an average tax refund of $2,500, you can realistically achieve your goal and purchase a home in three years – providing you save your money.
4. Boost your home’s value.
Home maintenance is a beast. If your house needs work, nothing gets the job done faster than free money from the federal government. Use your tax refund to remodel your kitchen, bathrooms, replace the floors or install energy-efficient windows. These upgrades not only improve the appearance and condition of your home, but raise your property value. And with energy-efficient upgrades, you might qualify for additional tax credits on next year’s tax return.
5. Plan you kid’s’ future.
College and cheap are never used in the same sentence. And if it weren’t for student loans, grants and other financial aid, many people wouldn’t attend a college or university. Make good use of your tax refund and start a college fund for your kids. Saving your refund over five or ten years can provide a sizable fund for school and reduce the need for student loans. Deposit this cash in a high-yield savings account and you’ll maximize your savings. These accounts have higher interest rates than your traditional savings account, letting you grow your money faster.
6. Think retirement.
You can never have too much in your retirement account, and if you haven’t planned for retirement, now’s the time to start. There are a couple of ways to approach this. Open an individual retirement account (IRA), or increase contributions to your employee-sponsored 401K. The maximum you can contribute to a traditional IRA for 2013 is $5,500 ($6,500 if you’re 50 and older).If you decide to increase contributions to your 401k, your tax refund can compensate for the difference in income.
7. Invest in your future.
If you’re over your job and ready for a change, using your tax refund to start a business can be the change you need. This money can cover the cost of supplies and advertisements. This is your opportunity to be your own boss and pursue your goals. Then again, perhaps you’re satisfied with being an employee, but you’re looking for ways to increase your salary. Your tax refund can be the edge you need. Take the money and sign up for college classes, seminars or workshops. As you take refresher courses and improve your skills, you’ll be more employable from a company’s standpoint. This can put you ahead of the competition when applying for jobs, and help you find employment faster as a job loss.