If you are expecting a refund this year, have you thought about what to do with your money? Maybe you already know what you want to spend it on, but does your plan support your financial independence journey? Did you commit to improving Your Financial Wellness In 2013? Although tempting, you should treat your refund check the same way you would treat any income, such as your benefits check or paycheck.
Remember, the government isn’t sending you free money, but your money has been held to cover taxes. If you receive a large refund, you may have too much money withheld. To decide if this is your situation, think about your monthly expenses. If you’re incurring debt, you may have room to have fewer taxes withheld. First, review your W-4 form and adjust your federal income tax withholding allowances. By reducing the taxes withheld from your paycheck, you can increase the amount of your take-home pay, giving you more cash to pay monthly bills throughout the year. Next year, your tax refund will be lower because you had less tax withheld from your paycheck.
Pay off high-interest rate credit cards. One of the best ways to use your tax refund is to pay down credit card debt. By paying down your credit card debt, you can lower your monthly credit card payments, saving you money on the interest you would have paid. If you have several credit cards, pay off the one with the highest interest rate first, then work on paying down the other ones.
Create a savings fund. Use your refund to create your emergency savings. Or, if you have sufficient emergency savings, you can start to save for a down payment for a home or a car. To find other money to add to your savings or reduce your monthly expenses, read our Start Saving With Your New Bank Account post.
Make extra principal payments on your mortgage. Making an extra payment on your mortgage may help reduce your monthly payments. Did you know that making just one additional payment on your mortgage each year can help you save a lot of money from interest?
We know that getting a tax refund feels good, and it can be tempting to splurge on something. Before you let your tax refund slip through your fingers, think about how you can best put your refund to use and continue to achieve financial independence.
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