Tax time can be a nice time of year for many struggling homeowners. Playing catch up or getting ahead can be far more comforting in the long term than that flat screen TV. Whether youâ€™re expecting $700 or $7000, spending your tax returns wisely can be a real difference maker for the rest of the year. Knowing how much is coming in can really help to pinpoint the best way to spend your cash influx. Here are seven smart ways to spend a tax return:
1) Catch Up
Past due mortgage payments and/or credit cards can really add a lot of unnecessary stress to the household. If the mortgage and debts are affordable, then catching up with the tax return is a great way to eliminate late fees, collection calls, and other stressors.
2) Pay OffÂ Debt
Nothing creates a little breathing room quite like eliminating a monthly payment. Consider paying off that credit card balance, or car loan to allow for more room in the monthly budget. If you cannot pay the loan off altogether, perhaps your tax return can be used to renegotiate your loan terms for a lower payment.
3) Make Needed Repairs
Is the car not running right? When is the last time you changed the oil, air filter, etc.? Many repair and maintenance procedures are designed to provide optimal fuel efficiency. This can greatly reduce the monthly expense for gasoline and larger repairs down the road. Maybe the house is in need of some care. Fixing small problems now, before they create greater problems, can save you thousands over the long term. Better a new roof now than a leaky ceiling in two or three years!
4) Save For Your Future
First establish emergency savings, at least three monthsâ€™ worth of expenses. If you already have that or more in place, consider long-term or even retirement savings. A tax return is a great way to start a Roth IRA. This may be the best vehicle for retirement savings that the government has given us. Saving a little now will allow for less frantic saving when you are older.
5) Save Toward a Goal
Sick of the same old car or longing for that much needed vacation? STOP adding debt and use your tax return to pay for it instead. Not expecting enough for a trip? Saving money for next yearâ€™s Christmas shopping is a great way to reduce holiday stress.
6) Invest In Your Home
With interest rates on mortgages at historical lows and property being readily available and inexpensive, now is as good a time as any to refinance or buy that house. You could use the tax returns for closing costs on a refinance which could shave hundreds a month off of your mortgage payments or reduce your term from 30 to 20 years, etc. Not ready to refinance? Consider putting money into your home to create equity. Focus on changes that add the most value to the home (typically kitchens and bathrooms).
7) Share the Wealth
Consider a local nonprofit that you feel strongly about and make a donation. You can always take a tax write-off for the current year if you get a receipt for your gift. I know people who pick up restaurant tabs for strangers, or leave a ridiculous tip, just to brighten someone elseâ€™s day. Helping others can be a great way to spend some extra money.
Keep in mind that if you are getting a large tax return every year, but you are just using it to play catch up all the time, that there may be a better way to distribute your tax contributions. You can use a withholdings calculator by visiting the IRSÂ websiteÂ and answering some questions about your income and family situation. If you reduce the amount you pay in tax it can provide a boost in your paychecks. Be sure to do this againÂ each January so you do not create a liability problem for yourself.
Keep these tips in mind to make a real difference in your personal finances while you have the chance. It is much easier to spend a lump sum like a tax return than it is to try to work more expenses into the monthly budget.
Malcolm Johannessen is a US Department of Housing & Urban Development (HUD) Certified Housing & Foreclosure Prevention Counselor with LSS Financial Counseling. LSS Financial Counseling is a member of the National Foundation for Credit Counseling.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.