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Tips to Budget a Tax Return

By Edited Nov 13, 2013 0 0

With easy tips to budget a tax return, you can be well on your way to saving money and spending wisely. We're all looking for ways to save money, and one of the most effective ways to save large amounts of money is to budget the tax return wisely.

Start before you receive your tax return. That's right, before the money is in your account, you should designate ways to save the money and ways to spend the money. This tip is crucial to avoid overspending or using the money foolishly when other, smarter alternatives exist.

Estimate how much you expect to get on your tax return this year. You can do this either before or after you file your taxes, but you must be sure to achieve a very close approximation as to what to expect to receive. For most people, it may make sense to budget your tax return after you know exactly how much to expect to get back. For some, it may be easy to figure out about how much to expect based on previous tax returns if your financial situation has not changed much from year to year.

Make a list of all debts you currently owe, including the total amount for each debt and interest rate for each. If you want to pay down or pay off some debt, it usually makes sense to pay the debt with the largest interest rate first. This way you will save more money over the long-term on interest. Generally, a credit card will have a higher interest rate than, say, a car loan, and typically a credit card would have less principal owed than a car loan. In this case, paying off the credit card first would make the most sense.

Make a plan based on all your debt as to what you want to pay off first, second, third, etc, using a reasonable time frame and amount of money you are able to pay on debt over the long term. This plan should include the tax return, but should also include other means of paying down debt as well if you want to pay off debt in the long-term, which would most likely make the most financial sense.

After reviewing your debt, take into consideration your savings. Do you have an emergency fund? If not, your tax return may be a good place to start. If you can allocate $1000 from your tax return for an emergency fund, you'll have a small amount of money set aside for emergencies and disasters. An emergency fund is an essential tool to have when getting out of debt because in the case of a financial emergency, you can use your emergency fund instead of credit cards to pay for unexpected car repairs, home repairs, or medical bills. An emergency fund is also a small cushion of cash if you lose your job. Typically you should plan to save up at least 6 to 8 months' worth of living expenses in case of job loss.

Now decide how much of the tax return you want to use for each category: debt and savings. There is no rule for doing this, and it really depends on your personal financial situation. If you feel comfortable with your debt but are lacking in savings, plan to use more toward savings. Be sure to allocate the bulk of your tax return toward debt and savings. If any major repairs around the home are immediately needed, figure the cost of this in as well.

The last part of budgeting a tax return is to allocate a portion toward fun stuff. Generally, it's a good idea to keep this amount under 20% of the total tax return. You may even decide to spend 10% of the tax return on fun stuff, like computer upgrades or a vacation. Be sure to save this part till last, as the actual amount allocated toward fun stuff would depend heavily upon how much is already allocated for debt and savings.

Simple planning can help you budget a tax return and get you on your way to a brighter financial future overall. Let the tax return be a stepping-off point to a new year of financial independence.



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