When too much of your income is withheld by the tax man, a refund is on the way. It may seem like free money, but in reality it’s your money that could have been used during the course of the year to pay your bills. Before your tax refund check arrives, you should consider the best way to use it. As much as you might want to purchase a new iPhone or flat screen TV, getting out of debt and securing a healthy financial future should be at the top of your list. To reap the most benefits from your tax return, take care of your responsibilities, improve your credit score, reduce your outstanding debt and enjoy the rewards afterwards.
PRIORITY #1: Focus on Past Due Bills
Taking care of past due bills is the first step to get a precarious financial situation under control and the most responsible way to use a tax refund. Unpaid collections are one of the worst things for your credit — so take care of those first. Debt collectors will continue to harass you until you’ve taken your delinquent bills seriously. If you address these issues now, your credit score will stop its freefall and will slowly begin to improve.
PRIORITY #2: Pay Down Credit Card Balances
After catching up on past due bills, the next priority should be to eliminate, or at the very least, make a large payment towards any outstanding credit card debt. While credit cards have an important part in a healthy financial portfolio, they should only be used when all other personal finances are being managed effectively. Take care of your highest interest rate credit cards first to ensure the most savings.
PRIORITY #3: Start an Emergency Fund
If you have any refund money left after your bills are current and you’ve made a nice dent in your credit card debt, begin a personal emergency fund. Many people fail to realize the importance of setting aside a bit for a rainy day, but in an emergency, having access to extra funds will prevent you from having to use a credit card or apply for a loan. Adding to your emergency fund will bring you a sense of security and piece-of-mind.
PRIORITY #4: Make an Extra Loan Payment
If you’re really serious about chipping away at overall debt, you might want to consider using some of your tax refund to make an extra mortgage or auto loan payment. Each payment that you can double-up will reduce the length of the loan and the amount of interest you will pay over time. The savings can be substantial!
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