What’s the Best Way to Use Your Tax Return?
The days are getting warmer and April is almost done. For most this means spring is on the way (although technically it should have been spring already), but for some this also means the dreaded tax time deadline. Getting your taxes taken care of can result in the wonderful feeling of receiving a refund when all is said and done. A scheduled windfall of money can result in a massive swing in your debt or anything else you can imagine. However, since we are talking about debt, there are a few ways to take care of your debt with your tax return (should you receive one). Lets take a look at some of the ways you can tackle your debt with your tax return.
First, What Kind and How Much?
Before you decide to pour your tax return money into your debt, you should first take into consideration the types of debt you have and how much you have. If you have multiple small debts (credit cards, small personal loans, utility bills) that can be taken care of by your return, eradicate the higher interest debts first. The best ways to help your financial situation is to make sure your debts have as little impact on your future as possible. Even if you have some debts remaining afterwards, you won’t have to worry about overwhelming interest rates going forward.
If your debts are larger in nature and amount and your tax return can only handle one or two debts in total, the same mentality applies to picking which ones to pay off. Make sure you keep your future in mind when looking to handle your debt. If you have multiple debts that are all around the same in terms of interest rate, it would be prudent to at least make a more than minimal payment on one particular debt that you can handle on a monthly basis. If you can’t take care of one debt completely, handling the majority of one debt makes it easier to resolve that debt into the future (even by your next paycheck!)
Second, How Much Did You Get Back in your Tax Return?
Once you know how much of a return you’re going to receive, you can plan out how you’re going to use it. If you get a sizable amount back in relation to your debts, budgeting a proper use of your return would be best. Many people don’t use their returns for debt payments (surprise, surprise) but for other essentials that may be pressing. If there is something that needs to be paid off before it becomes a serious issue, it should be taken care of immediately.
The more money you get back, the more options you have for paying things off. The ability to pay off debts increases with the amount of a tax return you receive. A common mistake that many people make is by spreading their tax return too thin. Even if you don’t incorporate your tax return into monthly budgeting, there should still be a plan in place upon receiving it.
Lastly, Which Debts Have Been Around the Longest?
Having to integrate your debts with your monthly pay may not always work. Your debts may be too great. You might not make enough money to pay them off. You might not even know everything you owe. In this case it pays to do some research on your debts to find out which ones have been around the longest. The longer your debts have been in existence, the more they can impact your credit history and your credit score as it stands. Longer standing debts may have a higher chance of being placed in to a debt collectors hands. In extreme cases, debt can be ruled upon in court, docking many points off of your score and negatively impacting your credit.
Once you have determined your tax return amount and any pressing matters it can handle, research your oldest standing debt and take care of it. It’ll be the first debt to knock out and it’ll show you how far handling existing debt goes toward improving your currently level of credit.
If you’d like to learn more about your tax return, Turbo Tax has some great information here.