Smart Options for Your Tax Return
A tax return can play a significant part in achieving your financial goals. Even if you aren’t sure you’ll be getting a return this tax season, it’s best to be prepared with a plan of how to spend it to make you more financially secure for the upcoming year.
In order to put your tax return to the best use possible, you need to know what your financial goals are—all of them, from short-, to medium-, to long-term goals. Are you paying off student loans or credit card debt? Do you need to save for a new car? Are you hoping to buy a house or pay for a wedding soon? Are there other big life events you see on the horizon that will require a sizeable financial commitment from you? A tax return is a great way to get a head start or make serious progress on these goals.
Look at your current budget and projected income for the upcoming year. Decide which financial goal needs to be addressed first. Perhaps it’s paying off debt or a loan so you have more money in your budget each month. Or maybe you know you’ll need a new car in six months, or your wedding is less than a year away. Once you have prioritized your goals, decide if the greatest impact will be in putting all of your return toward one goal, or splitting it up between two or more.
It’s always a good idea to pay off debt and loans first. However, if you are currently able to make your monthly payments without breaking your budget and you foresee another large financial need in the near future, then perhaps your tax return is best put toward this goal. Especially if it means avoiding more loans and debt!
If you are struggling to make ends meet each month with your current budget, you can also consider stretching out your return over the year as additional “income” each month. Divide the total amount by 12 to see how much extra money you will have each month. Deposit the money into your checking account. Remember to add this amount (however small) each month into your budget when considering your income and funds to pay bills.
As nice as it is to receive a tax return at the start of the year, the better approach is to not overpay the government, if you can avoid it. When you overpay, it’s like giving the government an interest-free loan out of your own pocket! That money could be doing you more good by earning interest in an investment or saving account. Or paying off debt. Talk to a tax professional to see what you can do differently this upcoming tax year to keep as much of your own money in your pocket as possible.