Tax time is often viewed as a stressful event but many people look forward to a hefty refund. It is exciting when we get a large check in the mail but experts say that this is not the best way to manage your money. Over-withholding is what leads to leads to an income tax refund and that means that the government is gaining interest off of your money. The IRS website offers a W-4 calculator that can help you decide if you should have less tax withholdings from your check. This would mean less of a refund but more take home pay. The average American received a tax refund $2600 in 2013. If you are expecting a sizable tax income refund this year, here are 4 smart ways to spend your money and 9 irresponsible ways to waste it.
The 4 best ways to spend:
1. Emergency Fund
Use your refund to start an emergency fund in case you fall on hard times. The target number is 6 months wages but if that is not possible the minimum should be 3 months saved. This is crucial in our recently struggling economy where there is little job security.
2. Save on Insurance
Most car insurance companies offer discounts to customers that pay their insurance premiums in advance. These usually fall in 6 or 12 month increments.
3. Start a Business
An income tax refund could provide you with the money to start a side business or invest in your education. Most companies pay raises out based on education and once you have acquired a new skill or achieved a field-related degree you could eligible for a considerable pay raise or bonus.
4. Save for your future
Saving your income tax refund for college or retirement gives your money time to grow. Invest in a 529 college savings plan for your children or in a retirement plan such as an IRA. Many of these investment programs are tax deductible.
7 Bad Ways to Spend:
Rather than invest, spending frivolously is the number one worst way to use your refund. There is no return on your investment when you buy a new television or cell phone but a $3000 refund invested every 20 years would gain a value of $189,000.
2. Wasteful Spending
If you have to spend the money, put it towards something that will result in a tax deduction next year. Many home improvement projects can be tax write offs or tax credits. Energy efficiency programs can result not only in a tax break but also in monthly money saved on energy costs.
Another better way to spend rather than invest, create a memory. If you must spend the money, go on vacation or visit family and friends. That is the only thing more precious than money saved, memories created.
3. Ignoring Debt
If you owe money for credit cards or other high interest loans, it is a bad idea to spend the money and ignore the rising costs of your debt. This could save the typical person 15% interest on credit card debt.
4. Loaning your income tax refund
It is best to avoid mixing business with pleasure or to refrain from loaning money to family or friends. If you cannot afford to give the money away then you cannot afford to loan it, there is always a chance that you will never get the money back and it may affect your friendships.
5. Not improving yourself
Spending money should have some benefit and the best investment is in bettering yourself. It should not be used for anything illegal or harmful to your health or your integrity. Taking a class, learning a skill or purchasing something to increase your earning power are all better ways to spend.
6. Making more debt
The worst idea is to use the money to create more debt. It should not be used as a down payment of a motorcycle or car because those items depreciate over time resulting in lost money; the evils of a bad investment.
7. Spree shopping
Income tax refunds are not lottery winnings and they should not be spent as if they are. Buying a pair of jeans just because you can is not a sound choice. If you are buying clothes to better yourself such as for a job interview or promotion then that is ok.
There are a number of ways to spend your income tax refund and regardless of the ways that you will choose to spend it, you are anxious to have the money in hand. There is a page on the IRS website, “Where’s my Refund?” and it will assist you in tracking your refund. There is also a hotline, 1-800-829-1954 that will offer the same service. If you choose to use the automated system you must provide your Social Security number, filing status and the amount of your refund.
Please allow 72 hours before checking on an income tax refund that was processed electronically and those who file by mail should wait at least 3 weeks.