Many people look forward to receiving a large tax return from the US federal government. Many times this time of year leads to more debt. Many people who receive tax refunds don’t use the money in their best interest.
- People use the money to buy more accessories to go with gifts received during Christmas. You received a new smart technology device and decide you want to get apps or devices to do more with the new device.
Solution: Don’t buy anything. Instead do research on hacks to find other ways to get the information or results you desired from buying he accessories. If there isn’t a hack, budget and save for the accessories.
- Use the refund to purchase a vehicle. This isn’t always a bad financial decision. However, if the costs of maintenance, fuel, insurance and property taxes aren’t factored in, this vehicle can become more of a financial burden. Just because you can afford the amount of the car payment doesn’t mean you can afford the vehicle.
Solution: Determine how much money you have available in your budget for car payment, maintenance, taxes, insurance, etc. Once you have this information, research vehicles which meet your budget.
- Not saving the money for emergencies. Most people don’t have any savings. Tax refund is an easy and painless way to create an emergency fund. Having at least $500 or up to $1000 is a great basic emergency fund amount. Grow this amount to 6 to 12 months of expenses. Don’t confuse this amount with 6 to 12 months of income. If you are living below your means your expenses will be less than your income.
Solution: Save from $500 to $1000 of your tax refund for emergencies. If your tax refund is less than $500, then save all of it.
- Immediately after Merry Christmas comes Unhappy Broke! Many people approach friends and family members for “loans” which will be repaid once they receive their tax refund. This generally doesn’t occur. Not repaying personal loans to friends and family members is one of the worst ways to damage or destroy a relationship
Solution: Don’t ask to borrow money and don’t lend money. If you have the money to gift, then do so. Just remember, people will beg for what they need and buy what they want many times.
This is why I say tax season is really debt season. Let’s make this WEALTH season. Use your tax refund to pay off or down debt. Resolve to make this tax season a prosperous season.