While tax season is not very fun, some filers find solace in receiving their refunds at the end of the year. However, expecting a refund and relying on it is not the smartest way to manage your money. The first step you should take if you receive a large tax refund, is to give yourself an instant raise just by editing the amount of income tax that is withheld from your paycheck. You can do this by submitting a new W-4 to your payroll department. If you’re reading this, and just realized you need a blank form to adjust, you can find one here. When you adjust the amount of tax withheld, you will receive a little more in your take-home pay. Ideally, at the end of the year, your tax liability will match the amount you withheld and no money exchanges hands during tax time. However, if you find yourself to be part of the group that enjoys the thrill of receiving “found money” we’ve put the list below together to help you use your refund in the best way possible with the help of Sam Kerch, of AskCPASam.
1. Get Your Debt Paid off
Paying off a credit card balance that is earning interest at 15% is an incredibly valuable use of your money. While you may think you’re doing fine just making the monthly payments on a credit card, over time the money you spend on interest could climb to equal the same amount, or even more, of what your original items purchased were worth. That’s why when you have some extra money on hand, it’s always a wise investment to pay down your credit card balances.
2. Put a Little Extra in Your Emergency Fund
We recommend having an emergency fund that can cover three to six months of fixed expenses (mortgage, utilities, food, etc.). This will help you stay on your feet in case of a job loss or unexpected health issue. Contributing a little more to this fund is always a good idea. If you don’t have an emergency fund set up yet, use your tax refund to set one up!
3. Add to Your Retirement Fund
A 2012 report from the Center for Retirement Research states, “at Social Security’s earliest retirement age of 62, only about 30% of households are prepared for retirement.” Consider how scary this is, especially because most Americans also expect to have a higher standard of living when they retire than they do right now! It’s always a good idea to contribute to your 401(k) or other retirement fund using your tax refund.
4. Go Back to School
Education is always a great investment that can lead to higher earnings down the road, and other long-term benefits. So use that tax refund and go get that degree!
5. Special Projects that Will Lead to Increased Value
The key here is “increased value. If you embark on a special project, make sure it’s adding value to whatever you’re working on. For example, if finishing your basement will increase the value of your home by 30%, and you can use your tax refund on it, go for it! Stay up-to-date on payroll and payroll-related news by signing up for our free insights !