Tax refunds don’t translate to fast cash
February 11, 2010 by Taxcut Editor
Filed under Personal and Business Taxes
Paying back a government loan
Consumers looking for fast cash should use their tax refund wisely. When people get a tax refund, they are getting a refund from the government on the principal of a year long loan. Interest isn’t part of payment and many people pay too much over the year. This is best handled by adjusting withholding upon situation changes, i.e. the purchase of a home, or sale, or a marriage, etc. Taxpayers that get a good tax return should be shrewd with the extra money and put it too good use.
Using a refund to pay down debt
By far the most important thing to do with a tax refund is to pay down debt. Since the recession forced people into hefty debt, a record number of people have been overcome with large interest rates. The accumulating debt needs to be paid down if anyone is to get out from under financial stress. Using a tax refund to pay debts is a great idea. That doesn’t mean only credit card debt, but also mortgage, car loans or student loans. For instance, one double mortgage payment per year can take two years off the term of the loan.
Building an emergency fund
Tax refund money can also be used to build up an emergency fund. One thing consumers learned throughout the recession was that cash reserves are the only sure-fire thing to count on. Creditors closed shop when the economy began to tank and it got too difficult to manage. Consumers who thought they would keep one emergency credit card stored away were surprised when lenders closed the unused cards or at minimum, slashed limits.
The lesson of the whole thing was that liquid assets are essential to maintain. When it comes to a tax return, the money can be used to start a good financial reserve. This can serve as a critical buffer for emergencies or disasters that require cash. It is suggested that people should have three to six months of expenses in savings as emergency money at all times.
Tax refunds into retirement savings
Fast cash from a tax refund can also be channeled towards retirement savings. Saving for retirement needs to be a priority for everyone. As Social Security winds down to oblivion, more people are going to have to take their retirement plan in their own hands. Experts caution that other priorities should not take precedence. Mark Zandi of Economy.com said, “Too many young parents prioritize their children’s education fund before their own retirement. The bottom line is – education can be funded through loans, grants, scholarships and part-time work. Retirement can’t.”
Fund an education account
On the other hand, if a consumer has their own retirement fund on track, using a tax refund for education may be a wise idea. It is never too early to start saving for college and the cost is expected to rise. There are many savings plans available, including an ESA plan and 529 plans. The sacrifice of money into the account right away is an option, and it will save money over time and a good education is invaluable.
Tax refund funding
Gone are the days when consumers viewed a tax refund as fast cash to spend frivolously. In today’s market, it’s crucial to manage money wisely. It’s especially crucial to manage money that comes to consumers in hefty amounts. As Zandi added, “Substantial amounts of money don’t come to consumers that often, so a tax refund is something everyone should be ready to take advantage of, and use in the most beneficial way possible.”
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