Many financial advisers and entities go out of their way just to help people know how to use tax refunds for effective debt settlement. Indeed, tax refunds are money that you can use to settle your existing loans, credits, and other forms of debts.
However, the first thing that you must remember is that tax refunds are not money that just popped out of nowhere. They are money that you own; it’s cash of a certain amount that’s returned to you – mainly because you overpaid the government. Usually, the amount of refund that you might find in your check is in the vicinity of US$2,000 to US$2,500.
Here are tips and tricks on how to use tax refunds in solving your debt problem:
First of all, make sure that you have no unusual deductions for the current year and hopefully in the future. If you have confirmed that this is so, you must change your with holdings in order to avoid doing over-payment. In the first place, you don’t want to give away your money and have anyone hold on to it for a year without the money earning some interest. It’s just an absurd thing to happen, don’t you think?
Make a correct adjustment
Calculate the adjustment in an easy manner, and this is by taking your tax refund amount and having it divided into 12. Adjust with holdings appropriately; which can be done through the help of your office’s payroll department. As this figure is adjusted, this can offer you a few hundred dollars of extra money a month that you can spend to pay off any of your existing debt; such as credit cards, car and student loans, among many others.
Now that proper adjustments are done for the future year, you can now focus on the right way of dealing with your tax refund that’s forthcoming.
Settle credit card debt
Most of us possess credit card debt. If you have one, settle it immediately. A $2,500 amount on credit card balance at 18% interest while doing minimum payments will require you 14 to 32 years to settle it completely. Others might want to use the refund however on financially rewarding endeavors other than reducing or even eliminating their debt.
What if you invest instead?
For instance, you might want to invest the money instead; insisting that you will just obtain the payment to your credit card debt from the returns that you will earn from your $2,500 investment. To be fair enough, let’s examine this route and find out if it is indeed a wiser way of using your tax refund.
This is actually a good investment if you will obtain the return that you need in order to fully pay your monthly credit card debt. However, for a $2,500 investment, you will need an investment scheme that will deliver 25 to 35% after-tax return for you to come up with the money to pay your debt.
However, if you use the tax refund to pay off the $2,500 debt on your credit card, and use the monthly payments that you waste on minimum payments and simply invest them during the same period of 14 to 32 years, such an investment will grow to a maximum of $175,000.
Now, it is a fact that most of us have more than $2,500 debt in credit cards. Apart from this, we also have to deal with student loans, car payment, and many others. Hence, as soon as you have made the right adjustment on the tax amount that’s withheld from your salary, use this amount to settle your most important debt. Pay off debt first before you even try to go to any financial ventures such as an investment.
And since, your tax return can’t do everything in terms of paying all your debts, it is advisable to seek professional advice – whether you obtain credit counsel or take advantage of a debt relief program. There are numerous debt management and relief options available, but the important thing is that you must act fast and promptly – to make things happen.