If you are expecting to receive a tax refund this year, you want to be making plans on how to use that money wisely. You should be reviewing your debt situation before you decide to buy something new with that money.
Using a tax refund to pay off or pay toward existing debt can return substantial savings on interest payments on a loan or credit-card debt. To calculate how much interest you could save by applying, for example, a $750 tax refund, to existing debt, visit http://www.powerpay.org. This Web site helps consumers determine how long it will take to get out of debt by making minimum payments, making a one-time extra payment, paying more than the minimum or snowballing payments.
When evaluating your debt situation, pay attention to credit card balances. Paying the cards with the highest interest rates down first may save you more money in the long run, but tackling such a large project may be discouraging to some. Some would rather pay the smaller debts first because they feel as if they have accomplished something. If you receive a substantial return, you could eliminate as many balances as possible.
As you pay off credit card balances, consider “snowballing” your payments into other debts. For example, once the debt to the department store is paid off, take that payment and add it to the Visa or MasterCard payment.
You will be amazed how much faster you are able to pay off debt when you snowball payments. The Power Pay Web site can provide an illustration of the difference these strategies will make.
In addition to paying off debt, there are other wise choices for using a tax refund. You could use it for home repairs that have been delayed due to lack of funds. Invest the money in a savings or money-market account for an upcoming payment or possible emergency, or add the refund to an Individual Retirement Account (IRA).
This will help you become more financially stable in the future. Also, a tax refund could be invested in yourself by taking courses or other job training to improve your skills. This could lead to raises or promotions that would pay back your investment in the learning opportunities. Be sure to look over your withholding statement to determine if the refund resulted from excess withholding, or was a one-time refund due to an unusual deduction.
If the refund resulted from excess withholding, consider reducing the withholding and put the difference in a savings or money-market account. That extra money every month may be the difference in having to use your credit card and accumulating excess debt. Remember, overusing credit may have placed you in a position of having to use you tax refund to repay now. Better management now could mean using your refund for something fun next year.