A tax refund should not be thought of as fast cash
Repayment of a government loan
Consumers looking for fast cash should use their tax refund wisely. When consumers get a tax refund they are receiving a government repayment made up of the principal of a year-long loan. Interest isn’t included in the payment and a lot of consumers are paying too much during the year. The way to manage this is to adjust withholding at times when a situation changes, i.e. a home purchase, sale, marriage, etc. Taxpayers who end up getting a good tax return should be wise with the extra money and carefully put the funds to good use.
Using a refund to pay down debt
By far the most important thing to do with a tax refund is to pay down debt. Since the recession forced people into hefty debt, a record number of people have been overcome with large interest rates. The accumulating debt needs to be paid down if anyone is to get out from under financial stress. Using a tax refund to pay down debt can be a good idea. That doesn’t just include credit card debt, but also can mean paying down a mortgage, car loan or student loan. For example, paying one double mortgage payment a year can shave the loan’s lifespan by two years.
Building an emergency fund
Tax refund money can also be used to build up an emergency fund. One thing consumers learned throughout the recession was that cash reserves are the only sure-fire thing to count on. Credit lenders closed their doors when the economic downturn was the most difficult. Consumers who thought they would keep one emergency credit card stored away were surprised when lenders closed the unused cards or at minimum, slashed limits.
The lesson to be learned was that liquid assets are crucial for every consumer to have. When it comes to a tax return, the money can be used to start a good financial reserve. This can guard against emergencies and disasters that need immediate cash. Experts suggest every consumer should have between three to six months worth of expenses saved up as emergency money.
Putting a tax refund towards a retirement savings
Fast cash from a tax refund can also be channeled towards retirement savings. Saving for retirement should be a priority for every consumer. With the dissolution of Social Security, more and more consumers are going to have to have their own retirement plan to sustain them. Experts caution that other priorities should not take precedence. Mark Zandi of Economy.com said, “Too many young parents prioritize their children’s education fund before their own retirement. The bottom line is – education can be funded through loans, grants, scholarships and part-time work. Retirement can’t.”
Fund an education account
On the other hand, if a consumer has their own retirement fund on track, using a tax refund for education may be a wise idea. It’s never too early to start saving for college and the cost is going to rise steadily over the next few decades. There are many savings plans available, including an ESA plan and 529 plans. Though there is the sacrifice of putting cash into the account now, it will save money in the long fun and a good education will be critical in years to come.
Tax refund money
Gone are the days when consumers viewed a tax refund as fast cash to spend frivolously. In today’s market, it’s crucial to manage money wisely. It’s especially crucial to manage money that comes to consumers in hefty amounts. As Zandi added, “Substantial amounts of money don’t come to consumers that often, so a tax refund is something everyone should be ready to take advantage of, and use in the most beneficial way possible.”