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Make the Most of Your Income Tax Refund


Make the Most of Your Income Tax Refund

By Tinica Mullings BuyBlackNYC.com Writer and Editor

 

Over 50% of Americans are expecting a refund after filing their taxes this year. If you fall into this category congratulations!! Although tax refunds are essentially money you have overpaid the government over the course of the year, for many of us it can feel like a bonus. That very perception of extra or bonus can lead to the mishandling of these funds. This is money you worked for and you should have a plan for it the same as a regular payday. That said, it is worth examining some of the ways you can make the most of your newfound windfall.

 

Education- “Education is the most powerful weapon which you can use to change the world”, Nelson Mandela. Why not use some of your refund towards higher education? Whether you are considering starting, going back, or already taking courses, if you are financing your education through loans it would be wise to pay as much as you can up front and forego years of interest. Perhaps you have already completed your education. If you have children, now is a great time to save for their education. By starting early you can allow compound interest to do more of the work ultimately requiring less cash out of pocket from you. Whether you invest in your own education or your children’s do a bit of research and the investment could likely contribute to lowering your tax burden for the upcoming year. In many instances there are tax credits or deductions offered for education expenses.

 

Real Estate– “Home ownership is the cornerstone of a strong community”, Rick Renzi. Your refund may not be enough to purchase a home or income property outright, but it can be enough for a down payment. Unlike a down payment for a car, cash towards the purchase of property has a better chance of ending up back in your pocket at the end of the deal. Property generally appreciates over time.

 

Debt Reduction– “Debt is the slavery of the free”, Publilius Syrus. If you have credit card or other debt I implore you to use at least a portion of your refund to reduce or eliminate it. After you file and before you actually receive your refund get a credit report. Take stock of the debts you have and create a plan of attack. Take special note of 2 things, the highest interest rate and the smallest balance. If you can’t afford to work on anything else, start here. Paying the debt with the smallest balance will provide a sense of accomplishment. Paying on the debt with the highest interest rate will give you the most value by reducing future interest accrued.

 

Emergency Fund– “Bad planning on your part does not constitute an emergency on my part”, Unknown. The old adage “expect the best but prepare for the worst” can be invaluable. Life happens, regardless of our preparedness. Whether it be car trouble, illness or a job loss, an unexpected financial burden can be devastating. If you don’t have an emergency fund, start one. Calculate your monthly living expenses and set aside between 3 and 6 months.

 

Pay on Principal– If you are fortunate enough to be a debt free home owner, you obviously have a great handle on your finances. Making one extra mortgage payment a year can reduce a 30 year mortgage by up to 5 years. This may not sound like a lot, but imagine being able to enter retirement earlier because you own where you live. This is another example of money that will end up back in your pocket. Reducing principle debt will ultimately lower the amount of interest paid and allow you to take more of the equity in your property home with you if or when you sell. Principal payments can also be applied to any other long term debt you hold such as car or student loans.

 

Fund your dream/ Start a business– “Entrepreneurs and their small enterprises are responsible for all the economic growth in the United States”, Ronald Reagan. Becoming your own boss is not as difficult as you may think. If you have any desire to work for yourself use your tax refund to invest in that goal. Buy the domain name for the business you dream of. Take a course that will provide the skills or certification you need to make your dream a reality. If you would love to be an entrepreneur but are not sure what aspect of business you would like to enter use the money from your refund to explore the possibilities. Most people would ask what you would do for free, I ask what you would love to do for a fee. If you are already self-employed, look at things you can do to build yourself or your brand and invest in that.

 

Pay in full– “We gain freedom when we have paid the full price”, Rabindranath Tagore. Paying in full comes with its advantages. There are a countless amount of things you can use your income tax refund to pay in full for. Be wise with them. Paying your car insurance bill in full can often yield up to a 20% discount as opposed to opting for a monthly payment. Paying for a vacation, furniture or even a car in full will allow you to forego the interest payments and in the case of a car eliminate risk of repossession should you find yourself in a position unable to make the monthly payment.

 

 

Retirement– “There are some who start their retirement long before they stop working”, Robert Half. Most of us hope to grow old. Fewer of us actually prepare for a life in which we do not have to work in our elder years. Retirement should not be determined by the age in which you are eligible for social security benefits. Instead, retirement should reflect the age that you have amassed enough to remain comfortable. This can and will vary depending on your mindset, work, and physical capabilities. Wanting to live long and planning to do so are two very different things. If your employer offers a 401k that you are not currently contributing to, start. In most cases the amount contributed is tax deductible and matched. You should also consider contributing to an IRA (Individual Retirement Account). Use your tax refund to invest in your future, envision yourself free from financial burden and responsibility.

 

 

T

 


January 28, 2014
Comments
  1. Roger said on January 30, 2014 4:36 am:

    Interesting!

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