Between television ads for tax offices or software and the endless stream of W-2s and 1099s that seem to be coming in the mail every day, there is just no denying that tax time is quickly approaching. Many people look forward to getting a big tax return because they have it earmarked for a vacation or “new toy” that they wouldn’t otherwise spend money on. While it’s definitely fun to splurge every now and then, and it’s easy to justify when it feels like a windfall of unexpected money, it may be a good idea to sit down and determine the best way to make your money work for you.
Do you have a lot of unsecured debt with high interest rates? Take a look at those bills. You may find that you can pay off one or two of the smaller balances. Or, you might be able to knock down the balance on that account with the highest interest rate. Both of those options would save you money each month on payments and in the long term on interest.
Maybe you’re able to handle your bills month to month, and you’re already doing a great job of paying down unsecured accounts. But you worry that some big, unexpected expense is going to appear out of nowhere and put an end to your plan. It may be a good idea to take your tax refund to your bank and either open a savings account or add to an existing one. That way, should the water heater bite the bullet or an unexpected medical expense pop up, you’ll be ready to cover the cost without having to use credit.
Planning even further ahead may be a great option for you, too! Put the extra money into your kids’ college savings to reduce the amount of student loans that are needed. Or, invest in yourself! Make extra contributions to your 401K or IRA plan. Nothing about the future is certain, but the more you plan ahead now, the better prepared you will be.
Once you have decided what to do with your funds for this year, it may be a good time to evaluate your taxes all together. If you got an extremely large return, it may be a good idea to adjust your withholdings to reduce the amount that’s taken out of each paycheck. That may help your monthly cash flow, especially if you are struggling to cover your expenses each month. If you end up having to pay each year, talk with a CPA or tax professional to explore options for increasing your withholdings to prevent from having to pay so much. Or, if you are an independent contractor or work another type of job that does not allow for taxes to be withheld from your pay, adjust your budget to set aside enough each month to cover your amount due come tax day.
Whatever your tax situation is, make a plan and make your money work for you!