Tax Refunds season can be a stressful time of year for a lot of people. But for anyone awaiting a refund, it can be a light at the end of a tunnel. That’s because the average refund could put more than $3,500 in your hands.
A sudden injection ofcash can give your budget a considerable boost, but before you spend it all in celebration, check out these dos and don’ts. They’ll show you how to use your refund wisely.
DO Pay off Debt
Tax Refunds from your name is always a good idea — whether you carry a line of credit, auto loan, installment loan, or credit cards. Even if you can’t pay them off entirely, your tax refund can help you make a serious dent in what you owe.
Just be careful to read your loan contract before you sink any extra payments toward your debt. While there are many financial institutions that allow additional payments against your balance when you borrow cash online in Texas, others won’t.
Some Tax Refunds direct lenders charge you for any payment that doesn’t follow your exact repayment schedule, including early or additional ones. This applies to some lines of credit, auto loans, and online installment loans in Texas, so always check before you use your refund this way.
DON’T Assume You’ll Get a Lot
Depending on your living situation and income, you can have a pretty good idea of the refund you’ll receive for 2020’s taxes.
Luckily, if you received a stimulus check in 2020, you don’t have to worry about it increasing your tax liability or reducing your refund. However, other things play a role in how much you’ll get back.
If you don’t factor them in, you could be in for a surprise come tax time. While you might wind up getting more than you bargained for, there’s also a chance you get a lot less.
If you believe the IRS is going to cut you a big check, it’s easy to slot it into your budget, spending the money before it gets into your hands. But with no guarantee you’ll even receive a refund, it’s never a good idea to bank on your refund as a done deal. Wait until you receive your refund to do any big spending.
DO Set Aside Emergency Savings
Tucking your Tax Refunds into a savings account is another good idea. You never know when you’ll get sick, your car breaks down, or you’ll need to make repairs on your house. Having your refund at the ready can help you cover these emergencies without putting it on credit or taking out one of the many installment loans Texas has to offer.
Emergency savings are at the best when you’ve squirrelled away somewhere between three and six months’ worth of living expenses. However, this is just a guideline. You may want to shoot for something bigger if you have dependents, a chronic illness, or you lost work due to the pandemic.
DON’T Treat it Like a Bonus
Your Tax Refunds return may feel like a major windfall when it arrives, but it’s nothing of the sort. Your refund represents the withholdings you made on every paycheck from the previous year, so it’s no prize; it’s your money.
Receiving a refund means the government took out more money than what’s appropriate for your tax bracket, and you’re simply receiving money that you overpaid.
In this way, celebrity financial advisor Suze Orman likens your refund as an interest-free cash loan you give to the government.
You can do that by updating your W-4, which is the official form that determines your tax withholdings. Lowering these withholdings means you’ll retain more of your income with each paycheck, allowing you to spend and save your money as you earn it.
Spending your tax refund wisely is easy — just follow these simple dos and don’ts when you receive your check!