Every tax season, a lot of us worry about filing because we are afraid of dealing with IRS collections. It's never fun to see that you owe the IRS and need to make a payment arrangement to pay it off. It's an added financial stress we'd like to avoid. But there's also the upside of tax season when you receive a refund. And while it may seem like instant vacation money in your account, there are smarter ways to spend and save your refunds.
While spending a little on yourself can be nice (especially if you are a person who doesn't normally do so), there are better ways to distribute your refund before you buy that plane ticket. The first thing you should consider is paying off any debts you have. Take a look at credit card bills and see how much you can afford to pay off and if you can bring your entire balance down to zero.
You should also use some of it to make payments on your mortgage. If you make an extra payment, it will go towards bringing down your principal, which means long term savings. It's possible that by making just two extra payments a year, you can pay off a 30 year mortgage in 15 years.
Opening an emergency fund is a great idea as well. You never know what may happen, whether a family member gets hurt and you have to pay hospital bills or you lose your job and need a way to pay for your house or apartment. Or maybe it just so happens you'll need to pay off IRS collections next year instead of getting another refund. It's always good to have some sort of a back up.
Now is also the time to take some money to invest in retirement. We all know that retirement funds, pension and social security are not the same for our current generation as it was for the ones before. It's important to take what extra funding we get to put towards a retirement plan, so we aren't caught in a bad situation as we get older.
Of course, setting a side a quarter of your refund for something more fun isn't a bad idea either. We all need a vacation to relax, or something new in our lives to enjoy, so don't feel guilty as long as you budget it accordingly. It doesn't hurt to enjoy a little bit of extra income!
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