It’s that time of year again… time to start thinking about taxes, if you haven’t done so already. If you were one of the early filers, you may have already received your return. So, if you were fortunate enough to get a refund—and didn’t have to pay in—have you decided how you will spend that newfound money? Here are five ways that you can use your tax return to your advantage, and put yourself in a better financial state.
Make an extra principle payment on your mortgage
Your house is probably one of the largest purchases that you will ever make in your life. And with it comes a large amount of long-term debt. Yes, the idea of taking out a loan for 30 years can seem a bit overwhelming. When you look at the purchase price of a home as compared to the actual cost of the loan (all monthly principle and interest payments), you quickly realize the impact of interest. For instance, if you buy a home for $150,000 at an interest rate of 5% and take out a 30 year loan, your monthly principle and interest payment would be $805.24. The actual cost of the loan, though, over the 30 year payment period is $289,886.40, almost double the purchase price! Let’s assume that you will get back $1200 tax refund; applying that to your mortgage each year doesn’t change your monthly budget in any way, but it will save you approximately six years of mortgage payments and over $30,000 in interest! Use an online mortgage calculator to figure out how much you can save on your mortgage loan.
Pay off your auto loan early
Putting extra principle toward your car loan is a great way to pay off your car early and drastically reduce your budget! If you have a car payment that is $200 each month, then using the same $1200 tax return to pay down the principle of your car loan will knock off over 6 months in payments… and free up your budget that much sooner!
Pay down credit card debt
Can you believe that the average household has just over $15,000 in credit card debt? Credit card debt is revolving debt, which means that interest is calculated daily, based on your average balance. A monthly credit card payment is also calculated based on the balance in the account, usually around 2%. So as your balance decreases, so does your payment, which means that credit card debt can hang around for quite a long time, if you are only making the minimum payment. Depending on the type of credit card you are using, your interest rate could be over 20% (this is especially true for store cards). Revolving debt is difficult to calculate because of the changing average balance and the daily compounding, but there are credit card payment calculators to help you figure out how long it will take to pay off your debt (be aware that it assumes a constant monthly payment though). Utilizing your tax refund to pay down the balance of a credit card can make a big impact on saving interest payments and getting debt free quicker.
Start a retirement account
Since your tax refund isn’t money you are dependent upon for monthly budgeting, it is a great way to set aside money into a retirement account every year. Open a traditional IRA and you will even get a tax deduction for money contributed to this account during the year, or a Roth IRA and your money will grow tax-free over the years. If you can also contribute each month during the year, that will help your retirement nest egg to grow even faster!
Savings—with a purpose
Another money savvy way to utilize your tax refund is to use it to pay for something specific. Perhaps you will use it for Christmas shopping later in the year, maybe it can pay for a family vacation, or go toward new furniture or tires for your car. Use it for anything that you were going to spend money on anyways, but make sure when you put the money in savings, you have a goal in mind for it. Without having a specific goal or purchase in mind, you may find yourself being tempted into buying a big screen TV or other item that you don’t really need.
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