If you’re among the Americans that receive a tax refund each year, make a tax season resolution to make your money work harder for you!
The ideal tax situation is a breakeven proposition – you don’t owe money and you don’t receive a refund. That’s how you know that you have the correct number of deductions coming out of your paycheck on payday. I know it can feel like a bonus to get a chunk of money each year, but you’re essentially letting the government borrow your money interest free.
Consider this; CNNMoney.comsays that the average tax refund in the United States for 2009 was $3,003. That means that by adjusting tax withholding, the average American receiving a refund could have put $250 more each month in their pocket.
Here are a few ways to make $250 work for you:
1. Pay down debt. $250 could make a large dent in your credit balances. Paying an extra $250 a month on a $15,000 car loan could shorten your term by two and a half years and save you nearly $800 in interest. (Assuming a 3.99% APR and a 60-month term.)
Making a larger than required payment each month could also work for credit card or mortgage balances. Your extra payment would go directly to principal to pay down the balance and save additional money in future finance charges.
2. Save. Savings goals like retirement or college can be reached with small amounts of money over time. If you saved $250 a month, in 10 years (earning an average of 4%), you’d have almost $38,000. That same amount over 40 years will be almost $300,000, due to the power of compound interest.
3. Spend. I’m not advocating spending your $250 on your shoe habit, but it’s up to you. For many families, $250 will keep them out of debt throughout the year. It’s like receiving a raise. Think of the extras that $250 could get you. Piano lessons? Groceries? Yes, even shoes!
Your Payroll department can help you adjust the tax deductions coming out of your paycheck and may be able to tell you how it will affect your paycheck.
So, if you’re receiving a tax refund this year, run the math for your own situation to help find the best way to make your money work harder for you in 2011. Good luck!