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The Best Way to Use Your Tax Refund

March 20, 2013

Getting money back from Uncle Sam can be a nice windfall of unexpected money.Don’t let it burn a hole in your pocket. When people get their refund they want to spend it because they feel like it’s free money even though it’s their money . At the end of the day, it might make the most sense to apply it toward any high interest rate debt they’ve accumulated.

Taxpayers need to keep in mind that a tax refund is essentially the government returning money that you overpaid at some point over the last year. I would recommend evaluating your financial situation to determine how to use the refund: pay down debt, increase savings, spend it or use it to invest.

If you have credit card debt or other high interest rate debt, financial experts like myself recommend using the money to pay it down.

If you are one of the very few fortunate and don’t have any debt, review or create your rainy day fund to make sure it has enough to cover three to six months of expenses.

If you have no debt and enough savings tucked away, financial advisors recommend spending a portion of the refund and investing the rest.

Opening up a Roth IRA with the tax refund can help establish more savings because you won’t get taxed on any investment gains.

Whether you spend or save your tax refund, it’s important to have a long-term view.  A $3,000 refund may not seem like a lot for one year, but if you get that same amount for 20 years, it can really add up.

For many people, getting a big refund check each year is a nice surprise. i recommend that you evaluate your withholdings because you may be losing out. For example, if you get back anything more than $2,000.00 or $3,000.00 back, you should contact a financial  expert to better estimate your taxes so less is taken out from each pay check.

The government is holding your money all year. It’s better to re-estimate your withholdings then give a free loan to Uncle Sam. By having the money sit with the government instead of in your pay check, you are losing the ability to earn interest on it or use the extra money to reduce debt.  

An easy way to calculate how much should be withheld is to go to the the calculator on the IRS website. Once you figure out the appropriate number, call your human resources department to get new W4 form and have it adjusted based on what should be withheld.

Some people like the concept of forced savings but they don’t understand that the government is using that money for 0% interest. Ideally you should be getting nothing back.

If you would like more expert advise you can always contact yours truly or one of our certified financial counselors at http://www.nwcdr.com/ 

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