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According to the 2024 GOBankingRates survey, more than 65% of Americans will receive a tax refund this year. This extra money can be a great way to tackle some of your financial goals.
Read next: 7 worst things you can do if you owe money to the IRS
Learn more: Do you owe money to the IRS? Most people don’t realize they have to do this
While most people have plans to pay off debt, increase savings, or invest that money, some may not be so wise with the extra money they have in their bank account. Keep reading as we break down some of the biggest mistakes you can make with your tax refund.
sponsor: Do you owe the IRS more than $10,000? Schedule a free consultation to see if you qualify for tax relief.
no plan
Planning is important for many things in our lives. The same goes for planning what to do with your tax refund. Before your refund hits your bank account, consider some things about your current financial goals. You may have credit card debt that needs to be paid off. Maybe you want to buy your first home. Alternatively, you can set up a college fund for your child. Understanding your financial goals can help you plan for the tax refund you’re about to receive.
However, this plan is only the first step. Once you receive your refund, start planning. Often people don’t have a plan or don’t follow through with their plan. The refunded amount will be kept in your bank account and used for other things.
“When you receive a large profit, such as a tax refund or bonus, you should use that money as part of your financial plan, not as ‘found money,'” says Jay Zygmont, CFP, founder of Childfree. says the doctor. wealth. “When you get a refund, it’s not a gift from the government, it’s a repayment of the money you lent throughout the year.”
Read more: This is the type of debt that ‘scares’ Dave Ramsey
forget about emergency fund
Having an emergency fund is one of the most important actions you can take financially. This provides a financial cushion in case of unexpected expenses. However, some people ignore the lack of an emergency fund when getting their tax refund.
Most experts recommend having at least three to six months worth of expenses in an emergency fund, but they don’t think you need to have the entire amount at once. Dedicate some of your tax refund to your emergency fund and use the remaining money to fund other items that are part of your plan.
Spend money on what you want, ignoring your own needs
It’s easy to think about all the things you want when you receive extra cash. However, following these desires can lead to neglecting what is most important.
“I’ve seen people spend money for all sorts of wants rather than needs or intentional planning,” Zsigmont says. “Vacations are common. Everyone wants to go on vacation, but instead of just going on a trip, you need to plan and save for your trip. You might be tempted to spend that money on a vacation. But if you’re still trying to get out of debt, you should go for it.”
ignore retirement
If you just graduated from college or are just starting your career, you may not be thinking much about retirement. However, this is the wrong idea. Investing as much as possible to retire early will help you retire comfortably and on your own timeline.
If you don’t have high-interest credit card debt and can’t allocate a portion of your tax return to fund your retirement, you’re missing out on a huge opportunity to position yourself financially for the future.
Mike Kojonen, founder of Principal Preservation Services, says, “Putting your tax refund into an IRA or retirement savings account not only supports your long-term financial goals, but can also provide tax benefits for the following year.” states. “This move is particularly advantageous for those who feel they are falling behind in their retirement savings.”
don’t ask for help
Receiving a large amount of money can be scary for many people. If you received your tax refund but don’t know what to do with it, that’s okay. The problem comes when people don’t seek the advice they need to make informed decisions. A financial planner can help you assess your financial situation and know how to best use your refund.
Once you know what to expect this year, consider working with a CPA or tax professional to maximize your tax withholdings. Ideally, you never want to receive a tax refund. In doing so, you would have provided an interest-free loan to the U.S. government. Working with a tax professional can help you adjust your tax withholding so that your refund is as close to $0 as possible.
conclusion
It’s great to receive a tax refund. It will provide you with a little extra cash. However, it is important to plan and spend your money wisely. Use it to tackle important financial goals, such as existing debt, retirement funds, or other savings.
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This article originally appeared on GOBankingRates.com: Top 5 Mistakes People Make with Tax Refunds
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