(ThyBlackMan.com) For many Americans, tax refunds represent the only money they receive during the year that is above and beyond their normal pay. Maximizing the benefit from this lump sum payment and deciding how to allocate it among various priorities – savings, debt, household expenses and more – is often a challenge.
This year, consider spending your refund a little differently. Use the money to gain financial breathing room and set yourself up for success the rest of the year. Paying down high-interest debt or padding your savings account can help alleviate financial stress long after tax season is over. There are four rules of thumb to consider.
Start an emergency fund. If you don’t have an e
mergency fund to ease the stress of the next unexpected expense, direct a portion of your refund toward establishing one. Consider contributing 70 percent if you are just getting started. If you already have $2,000 in savings, allocate 20 percent of your refund to keep it growing.
Pay off debt. If you have an emergency account already, consider using 50 percent of your refund or bonus to pay down high-interest debt. If you used a large portion of the refund to establish your emergency fund, set 20 percent aside to pay down debt.
Reward yourself. Consider “paying” yourself 30 percent if your emergency fund is over $2,000; if under $2,000 this number should be 10 percent. If you are planning a summer vacation or weekend getaway, use your refund to prepay the hotel room or plane tickets. Often you can get a discount on hotel rates if you pay in advance – and you won’t have bills to pay when you get back.
Review your tax withholdings. Finally, if you received a sizable refund, you may be paying too much in taxes throughout the year. Consider adjusting your tax withholdings so that less money is taken out of each paycheck. You can use that money to increase your contribution to an employer-sponsored retirement plan or health savings account.
Tax refunds can be a welcome financial windfall, but they are easily spent and forgotten without a plan. Resolve to do things differently this year. Saving more, paying down debt and even adjusting your withholding allowances can give you greater financial confidence all year long – not just during tax season.
Written by Laurie Fryer
Via http://Afro.com