SKIP THE REFUND AND PAY YOURSELF FIRST
Posted on: Mar. 04, 2017 in Debt

Many people look forward to tax season all year because they know that they’ll be getting a refund. That annual cash windfall is often viewed as a bonus that can be used to pay off some debt, bolster savings, or even allow for a little shopping spree. While it’s certainly nice to suddenly get a fat check in the mail, over-withholding on taxes isn’t in your best interest.

When you have taxes taken from your paycheck, you’re giving that money straight to the government. It sits there until tax time rolls around and then you get some of it back. While it was gone, it wasn’t working for you to either lower your debt, ease your financial burdens, or earn interest. Now, who do you know that would be willing to give you money or resources with nothing in return? That’s right, no one.

If you receive a large tax refund every year, consider speaking with a tax professional who can advise you how to change your withholdings so more money is in your paycheck. From there, determine how your bump in take home pay can be best utilized.

  • If you’re in debt, allocate this new amount straight to paying it off. Whether you attack your smallest debt first to quickly see success or focus on your highest interest rate debt to stop paying out interest charges, that new money can make a dent in what you owe. Credit card debt often carries an interest rate of 15% or more. Student loan and mortgage debt can cost you up to 5% or more. Letting the government borrow your money for free makes it harder for you to pay off your own debts.
  • If you’re not able to make ends meet currently – you have a shortfall of cash each month or you’re just scraping by paycheck-to-paycheck – an extra couple of bucks in your paycheck can help. This doesn’t just go for paying down debt, but it also speaks to that rut where maybe you’re charging things monthly when the cash runs out (even if you pay it off). Let your money work for you to ease some of the stress of not having enough.
  • Next up, look at your emergency fund. $1,000 is a good place to start, but ideally you should have three to six months’ worth of expenses saved up in case of a job loss, injury, or some other sudden incident. Adding to your interest-earning savings account is a much better way to use that money than to loan it out for free.

Getting money is always nice. But stop giving the government an interest-free loan. Instead, set yourself up for financial success by getting out of debt, building your savings, or padding your monthly budget.

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