If you’re anything like me, you have a love-hate relationship with tax season. You love the idea of having that fat tax refund check headed your way but hate it because the money is always gone before you know it.
Let’s do it differently this year. NOW is the time to make a plan – BEFORE that check is in your hot little hands. Spend it on paper first. That way, you’ll spend it with confidence when you actually have it.
Here’s the plan we recommend to our clients whenever they have extra money come in. It works for tax returns, bonuses at work, monetary gifts from family, or any other source of extra income.
First: Put one-third into savings to start (or add to) your emergency fund.
If you don’t have a separate savings account, open one. An emergency fund is exactly what it sounds like it is – a source of cash for life’s emergencies. It keeps you from racking up expensive credit card debt when life gets sticky. Make a plan to add to your emergency fund each month, even if it is only $20. Resist the temptation to dip into it for non-emergencies. (And, no, those cute boots on sale or hot basketball tickets are NOT real emergencies!)
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Second: Examine and repair your credit report.
Get a copy of your credit report for free at www.annualcreditreport.com and look it over carefully. If there are errors in your personal information, accounts you don’t recognize, negative items that are more than 7 years old, collection accounts, or court judgments, you may benefit greatly from professional credit restoration. Our services are backed by a satisfaction guarantee and we’re recognized by the IRS as one of the few reputable, non-profit organizations in the US specializing in credit restoration and education. We don’t charge monthly like some companies, who draw out the process for months on end. You pay us a one-time fee of only $349 and start seeing real results in as little as 2 weeks. Contact us today for more information.
Third: Set aside 5% of the total refund to spoil yourself or your family.
Do something nice for yourself! You deserve it. Just be sure to stick to the 5% rule and don’t spend it before you actually have the money in your hand. Putting your treat on credit in anticipation of receiving the refund might backfire and cost you extra in interest and fees.
Fourth: Examine your debts and find one (or more) that can be paid off by what’s left.
If you have a few to choose from, pick the one with the highest interest rate for the biggest financial gain. You’ve been paying the bill each month so it is already part of your budget. Get an even bigger benefit by taking what you were paying and adding it to the payment for the debt you want to pay off next. You’ll pay it off faster and save money on interest. Keep stacking your payments like this as your debts get paid off and you’ll be debt free before you know it!
Here’s an example with real numbers for you:
Rick is getting a $3200 refund this year. He will put $1067 (one third of the refund) in savings to be his emergency fund. He spends $349 on credit restoration, $160 (5%) to take his girlfriend out to a fancy dinner and a movie, leaving a remainder of $1973. He pays off a one credit card completely and makes a double payment on another. His minimum payment for the card he paid off was $88 a month, which he now adds to the next card he wants to pay off. Doing this, he pays that one off 3 years earlier and saves about $1250 in interest (which he can add to his emergency fund!).
What’s the moral of the story? Be proactive with your tax refund. It’s not a gift from Uncle Sam… it’s money you earned and the government borrowed interest free for an entire year! Don’t blow it on frivolous nothingness… use it to better yourself, to start yourself off on a better financial path.
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If you have any questions, please give us a call at 770-952-5168 or contact us online.
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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult a attorney who specializes in consumer rights and defense.