Check out our top do’s and don’ts for tax returns.
Q: I got a bigger than expected tax refund this year and I don’t want to blow it all. How can I use it responsibly?
A: You’re already on the right track by thinking about what to do with your small fortune instead of splurging and then watching it all disappear within a few weeks. When you receive an unexpected windfall, whether it’s from a tax refund, work bonus or a cash gift, it’s always a good idea to be proactive about how you’ll spend it. Below, we’ve listed some dos and don’ts for you to consider.
Do: Pay down debt
You probably don’t want to see your entire refund go straight to your credit card bill, but you don’t have to take the all-or-nothing approach. Consider earmarking 30% of your windfall and consulting a lending professional to find the best option for consolidating high-interest debt. You’ll save a ton on interest and you’ll pay it off sooner than you’d planned.
Don’t: Lend out your refund money
It’s generous of you to want to help a friend or relative out of a tight spot, but lending all your refund money is not the smartest idea. You might not see that money for a while, and if you do, it’ll likely be repaid in small amounts instead of the large chunk of cash you have now. And that severely limits what you can do with it. If a friend or relative is in need of financial help, consider referring them to a Northern lending professional hyperlink to discuss a share secured or personal loan. With a share secured loan you can lend them money to deposit and make payments on while building their credit in the process.
Do: Start saving or investing
If you’ve been waiting until you have a substantial amount of cash in hand to start a savings account or an emergency fund, you’ve just run out of excuses! Take $1,000 out of your refund and use it to start a savings account. You can set up an automatic transfer to take money out of your checking account each month to help it grow, even if you can only set aside $10. The head-start you’re getting now, along with monthly contributions, will add up quickly.
If you’re feeling super-responsible and forward-thinking, use this opportunity to start investing. If you receive a refund of $2,800 and invest this money at 6% interest and you continue investing this amount each year, you’ll find yourself with approximately $250,727 in 30 years’ time. Now that’s making your refund work for you!
Don’t: Invest in a low-interest account
If you decide to sock away some or most of your refund money, be sure to choose the best account. Keeping all of that cash in a low-interest savings account or an ordinary checking account with little to no interest at all will dramatically decrease its growing power. If you’re not sure where to invest or save your refund, call 315.782.0155, click or stop by any relationship center where a member of the team is happy to help.
Do: Invest in yourself
You are your own most precious commodity, so invest in you! Advance your career and increase your earning power by using your tax refund to pay for a work-related conference, additional training in your field or for learning an entirely new skill. Money invested in yourself is never wasted!
Don’t: Blow it all on impulse buys
Don’t spend your entire refund without planning or you’ll be setting yourself up for disappointment later. Consider making a plan where you allocate money to things that will set you up for financial success like paying down debt, saving, investing in yourself, and making needed larger purchases.
Do: Reward yourself
It’s okay to invest in a long-term purchase like a new stove for the kitchen or tires for your car, because items like these will pay off in the long run. Be sure to also consider your long- term financial goals and get ahead by paying some bills in advance in case the unexpected happens.
Don’t: Receive your refund on a gift card
You can choose to get your tax refund deposited directly into your checking account or get your refund via gift card. Skip the gift card as some have fees and can limit the way you spend your refund. Choosing direct deposit makes it easy for you to transfer funds to reach your savings goals or pay down debt. When direct depositing a joint tax return make sure both names are on the account and the 10-digit account number is included.
Do: Donate to charitable causes
The bonus cash in your pocket gives you the opportunity to give back to your community in ways you might not be able to afford throughout the year. Plus, it gives you a head start on potential deductions for next year if you plan to itemize. Looking for a way to pay it forward that doesn’t cost you anything? Check out the ideas on our website for giving back.