As soon as the New Year begins, you’ll find that emails and letters start coming in with “important documents enclosed.” This signals the start of tax season! If your taxes are fairly straightforward, this isn’t such a bad time of year. However, if you have a very complicated tax situation, it can mean you have to go digging for tons of different receipts and documents and figuring out whether different tax codes apply to your situation can be incredibly frustrating, even when you have the help of a professional.
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For some people, there is a light at the end of the tunnel — a tax refund! Even though this means that you have essentially let the government use your money all year without charging them interest, it can be nice to have a decent chunk of cash coming your way in April. Don’t be foolish with that money, though — here are some ideas for making sure it is put to good use.
Reduce your debt. This is a no-brainer, especially if you have high-interest debt. Make sure you have enough cash on hand in your emergency fund but then use the proceeds from your refund to wipe out some of your debt (car loans, student loans, credit card, etc.). An added benefit of doing this is that you will reduce the size of your monthly bills, freeing up your monthly cash flow throughout the year.
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Make some home improvements. You don’t have to go out of control with updates to your house but if there are some little things you’ve been meaning to do that will make your house more enjoyable or comfortable to live in, such as painting a room, buying some new furniture or updating some lighting fixtures. This type of work could even be considered an investment in your home in that it may improve its resale value. Using your refund money will allow you to pay cash and avoid borrowing for these repairs or improvements, which is always a good thing.
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Avoid borrowing. If you have a big purchase coming up that you were likely going to need to borrow for, use your tax refund instead. This doesn’t mean you should upgrade to something new that you weren’t already planning on but if you really are already in the market for a new car or a new washer and dryer and were planning on financing part or all of your purchase, using your tax refund as part of your down payment to reduce the amount you’ll need to borrow will save you money in interest and will also lower your monthly bills.