Perhaps you filed your taxes months ago or maybe you just filed for an extension, as you did last year and the year before that. Either way, as Benjamin Franklin said, “In this world, nothing can be said to be certain, except death and taxes.” Fortunately, for many us, there is one good thing that can come from filing taxes – a tax refund.
Many people see a tax return as free money from the government, instead of money being withheld from your paycheck to pay your taxes. Logically, most people understand that a tax refund is hard-earned money; however, emotionally it can feel like a windfall. And windfalls – money that is not part of your expected income stream; which includes an inheritance, bonus, and tax refund – are typically spent more frivolously. As tempting as it may be to spend your refund on a vacation or a big ticket item, here are 4 ideas to help you stretch your tax return into more savings.
1) Pay down your debt. Start by using your refund to pay off the credit card balance with the highest APR so you can minimize the amount of interest you pay. When you pay off a credit card balance with an 18% interest rate, it’s essentially like gaining an 18% return on an investment, which is hard to do in this low-rate environment.
2) Enhance your job prospects. Invest in yourself by using your tax return to pay for a Continuing Education class designed to help make you more money in your career. Not only will you be less likely to face unemployment, you will also be better prepared for a changing economy.
3) Update your appliances. Are you tired of your summertime utility bill increasing dramatically because of your old air conditioning unit? Do something about it by sealing the small cracks that are leaking out cool air, adding insulated windows, or updating your air conditioning unit with a high efficiency HVAC system. Minor upgrades like these will pay for themselves in a few years by reducing electricity bills and potentially add thousands in added home value.
4) Save for a rainy day. If you don’t have an emergency fund, use part of your refund to start or enhance your emergency fund. An emergency fund is another way of spreading the risk that something unexpected pops up and changes your budget. Experts recommend that you keep an emergency fund of three to six months of living expenses set aside in the event you lose your job, get sick, or experience something else that prevents you from collecting a regular income. Having a stable emergency fund will help you ride out the storm and keep you from relying on high interest credit cards.
Before you make big plans for how you’ll spend your 2014 tax refund, review the following facts:
Tax Refund Facts*
- 12 million taxpayers will file an extension, giving them an extra 6 months
- 40% of individuals will prepare their own taxes
- The average refund in 2013 was $2,792
- The IRS issues more than 90% of refunds in less than 21 days
- 78,769,000 families will receive a refund
*Source: IRS.GOV, as of April 14, 2014
Do you have any ideas on how to stretch your tax return into big savings for your home? Please share them in the comments!