Tips on What to Do With Your Tax Refund

Income tax time is upon us, and some of us are going to get a nice refund. What a lot of us do is get our taxes done, get our refunds and will end up spending it within a few weeks. And that’s a problem with some of us as a people. We take our tax refund and try to keep up with the Joneses. In recent years, you can take your W-2’s to a car dealership and get your taxes done. They prepare your taxes in exchange for a car. The sad part is that the dealerships that are in the urban neighborhoods are focusing on this because they assume that we only buy cars around income tax time. And most check cashing locations in our neighborhoods do the same thing as well. What we have to do is control our own income tax refunds. Here are a few suggestions on what we can do with our upcoming income tax refunds for this year and maybe we can follow these going forward every year:

Pay Off Debt

If you have a credit card with a double-digit interest rate, the best thing you can do with your money is to pay down this debt. If you're like many Americans, you may not be paying much more than the minimum payment each month. When you pay only the minimum payment, most of it goes towards interest instead of reducing the amount you borrowed (the principal), which is why it takes so long to pay off the original debt (often 20 to 30 years).

Start A Retirement Fund

Did you know that if you put away $1,000 a year for 25 years at a 12% interest rate, you can accumulate $1,000,000 by the time you retire? That way, if or when they decide to eliminate Social Security altogether (which I think will eventually happen), you’ll still be able to retire and live comfortably with no worries.

Make an IRA Contribution Now

If you're eligible to make an IRA contribution, you can come out ahead by making it now instead of waiting until you file your taxes in April. Why wait until April to start earning money on your contribution?

Pay Down Your Mortgage

Making a lump sum payment to be applied to the principal on your mortgage can save you the most money in the long-term because mortgages are usually our largest and longest-term debt. A $1,000 pre-payment on a $100,000 mortgage at 7% would save you over $4,000 over the life of the loan.

Pay Off Your 401(k) Loan

If you've borrowed from your 401(k) account and are thinking you're coming out ahead because you're paying yourself back by making the loan repayments, think again. You'd be better off to pay off the balance and use the money you would have applied to loan payments to make additional tax-deferred contributions to your account instead. Remember, the money you borrowed is not in your account and therefore is not earning interest or appreciating in value.

Beef Up Your Emergency Fund

The job market is unpredictable, and your job might be one of the next to be cut. Don't be caught unprepared if you're one of the hundreds of thousands of people who are laid off or fired. You should have an emergency fund that would cover three to six months worth of your basic living expenses. If you don't, adding your tax rebate or refund to your emergency fund may be a smart thing to do.

What's best for you always depend on your personal situation, but for most people, one of the options discussed here will benefit you most in the long run.

All in all people, we have to become debt free and financially independent for 2008 and beyond. A lot of us claimed in resolutions that we want to get out of debt and save some money. What better way to start your plan to get out of debt than with your income tax refund? That way you can still live off your regular income and still be able to save. You can do these steps once a year for the rest of your life and still keep your standard of living the way that it is now. The best and most important part in all of this is that you’ll be in control of what you do with your money. 

If you need any further assistance, please contact Provident Business Services at 484-857-7012 or mwaring@provbiz.net.