With the Holidays behind us, it is time to look to the New Year. For many of you this may include an income tax refund. As counselors, we have seen lots of financial patterns over the years and have used that experience to compile some tips for making the most of your tax refund this year.
- Avoid costly income tax refund advances: In the past, early refund loans have been very popular. They have also been costly, charging hundreds of dollars in fees to give you access to your refund a few weeks in advance. In recent years the rules for tax professionals providing refund anticipation loans have restricted the fees that can be charged, but keep in mind, there are usually still applicable fees. Some companies are offering no-fee, interest free refund anticipation loans, but you must be able to qualify for these based on credit and other determining factors. If you do not qualify you will be offered an interest based loan with fees. The average interest rate is around 36%. Be aware of what you are signing and how much it is costing you. Additionally, paying one of these organizations to file for you can cost much more as well. Local accountants often charge much less, or you can file online for free if you meet the income guidelines. The best way to save money is just to forgo the early refund and use your bank account for direct deposit. You may only wait a few extra weeks, but you can save hundreds of dollars!
- Use direct deposit: As mentioned above, using direct deposit into your bank account is the best way to receive your refund. The other option with most tax preparation organizations is to have the money deposited onto a debit card. But with these cards you are unable to access all of your money at once and are limited only to the amounts you can withdraw from an ATM machine which may also charge a fee each time you make a withdrawal. Additionally, you may actually be charged a small fee each time you use the card to make a purchase. Don’t pay someone else to use your money! Direct deposit is really the best way to go.
- Build savings: It isn’t often we get a lump sum of cash like an income tax refund. This is great opportunity to create an emergency fund or give your existing savings a boost. Think carefully about the amount you are receiving and what you plan to do with it. While it is tempting to use it to take fun trips or buy expensive items, consider saving at least a portion of your refund.
- Pay down debt: The extra cash that an income tax refund provides is a great way to pay down debt, but it is wise to keep a few things in mind. First of all, don’t prioritize debt repayment over creating an emergency fund. If you pay down debt but have nothing to fall back on in case of a crisis, you are likely to take out more debt if an emergency occurs. So save a little even if you plan to use some of your refund to pay down debt. Also pay smaller debts off first. If you can pay several small debts in full rather than throwing a chunk at a much bigger debt, it may make payments more manageable for the larger debt, and it will clean up accounts on your credit report. You can then “snowball debt” by adding your minimum payments on debts paid off to the payment you are making on the larger debt to pay it off more quickly.
- Prepay costly expenses: If you aren’t paying debt off with your refund, or if you have money left over once debts are paid, you can use the money to reduce monthly expenses. For example, rather than paying car insurance on a monthly or quarterly basis, use your income tax to pay the premium off and illuminate that bill for the year. You may receive a discount by paying some debts this way, and you will free up cash flow in your regular monthly budget.
An income tax refund is a great way to get a head start on financial stability. If you are able to get a step ahead this year, take advantage of that and try to avoid falling into spending habits that will require all of your refund next year. Avoiding unnecessary debt throughout the year will free up your next refund for more saving, maybe more fun, and possibly reaching even bigger goals such as a down payment on a home or a car. If you would like professional assistance with meeting your financial goals this year, contact Clinch-Powell. We would be happy to help!