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5 Financial strategies to use your 2012 tax refund

January 10th 2013

Come April 17th, there is going to be a frantic rush of people filing their taxes with the IRS. Tax day is just around the corner and every individual across the country is busy crunching numbers and scrounging for receipts, building their reports and filling up the IRS form. Along with filing income tax, an individual has the option of filing for tax returns or tax refund.

A tax refund is generally awarded when the tax liability of a person is less than the taxes he paid. Given the difficult format of the IRS forms and complex financial situations, most people fail to file their returns properly. Moreover, hardly anybody uses tax refunds to better their financial situation. Here is a short guide to help you figure out how to use your refund check effectively.

  • Clear your debts – You can use the refund check to pay off a sizable portion of your debts. Paying down your debts has innumerable benefits. Pay off the outstanding balance on a high interest credit card and it will indirectly secure a sizable savings. The idea is simple. If you are making the minimum payment on a credit card with a $1000 outstanding balance, it will collect $100 to $300 a month as interest. If you pay off the entire debt in one go instead of making the minimum payment over a year, you would be technically saving a minimum of $1200 or more.
  • Fund your retirement plan – For most people retirement means no steady source of income and increasing expenditure in the form of health care costs. Coupled with a dwindling savings fund, it can pose a problem for ageing retirees. Along with investing in all your other retirement savings plans, it is a good idea to put your tax refund check into a Roth Individual Retirement Arrangement (Roth IRA) account. In case you don’t have a Roth IRA established at the moment, you can use this year’s refund check to start one. You can open a Roth IRA, provided that you meet certain income requirements defined by the IRS. Even if you have a 401(k) or a 403(b), you can still open a Roth IRA.
  • Build up your emergency fund/college fund – Handling personal finances efficiently can be quiet a challenging task, especially for planning contingencies. You never know how situations are going to be in the next 3 years or you just might be faced with a hefty medical bill. Create an emergency fund just for the purpose of meeting expenses in case of an unforeseen situation like an accident or a lawsuit. Use the refund check to finance the fund. Saving for your child’s tuition is always a priority. You can use the refund check every year to provide an additional boost to the college fund.
  • Purchase property – Investing in real estate makes perfectly good sense in case you have been planning on buying a home. The current pricing of real estate is still in a state of depression due to the housing bubble bust. You can take advantage of this fact and set your sights on buying a new home in the next 3 years or so. Use the refund checks and build up your investment capital. In case you already own a home, try and use the tax refund to pay off a significant portion of your mortgage principal. Talk to your mortgage lender and find out what are the early pay-off options available under the terms of the loan.
  • Fund your travel budget – A bit of extra income would always make you want to splurge a little. You can use the refund check to finance your vacation or travel plans. It will cover a significant portion of the cost and keep you from spending out of your own pocket.

Cashing the tax refund check and putting the money into a retirement fund may not sound as exciting as purchasing a brand new computer or a flat screen TV, but it will help your finances grow at a steady pace. The tax refund check, if used wisely, will ease the pressure of credit card bills and mortgage payments and let you breath a little easier.

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