How to Spend Your Tax Refund Wisely
- The average tax refund amount for 2021 was $2,800.
- Due to the large sum of money, sometimes, people may overspend their refund amount instead of managing it properly to help them improve their future financial situation.
- Below are a couple of ways you can use your tax refund wisely to improve your future financial status.
With the current tax season underway, now is the time to receive a refund from the Internal Revenue Service (IRS) for tax returns made regarding the prior year's income. Last year, the average tax refund amounted to $2,800 for individuals and families. When a person receives their tax refund, it results in an influx of cash, which can be for living expenses or personal pleasure. Regardless of its usage, you must spend the money efficiently to maximize its benefits.
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Common Money Mistakes
When some people receive their tax refund, they make mistakes by spending their tax refund money ineffectively, thus leaving them in a similar financial situation than before receiving their tax refund. Therefore, it is essential to take note of some of the most common mistakes made to ensure these do not occur once you receive your refund.
Purchasing Designer Clothing
Designer clothes create the deception that they are valuable indicators of a person with high financial status. However, this ideology is incorrect, and it has been proven that designer brands do not advertise their products to wealthy individuals; instead, those who wish to look rich. Consequently, it is important not to fall into the trap of purchasing expensive clothes when you could buy a similar design from another brand for a fraction of the cost.
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Another critical mistake some make when receiving large sums of money is impulsively buying items. Impulse buying negatively affects one’s financial position as money is quickly being spent, and more often than not, these transactions are not being recorded/looked over.
Consequently, when transactions are not tracked, it results in a higher amount of money being spent, ultimately negatively affecting your financial status.
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Although these common mistakes are costly when done excessively, spending a tiny portion of your tax refund or income on designer clothing, or impulsive spending is not an issue. However, if they are done too often, it will result in a large sum of money being spent when there are better cost-friendly alternatives.
Smart Money Moves to Make
With this large influx of cash, it must be adequately utilized to help improve your financial situation in the future. Here are some potential ways the tax refund could produce a future benefit.
Invest in the Stock Market
Investing in the stock market is the best way to grow money over time. The stock market helps grow capital over time due to the compound interest from investing regularly. On average, the stock market provides a 10% annual return, and with regular investments, this would result in more money available once you retire.
Contribute to Emergency Savings Fund
With the large sum of cash from the government, now is the ideal time to contribute to the emergency fund. The emergency fund consists of three to six months worth of living expenses. Therefore, it is vital to have an emergency fund to aid in paying for living expenses should an unexpected circumstance occur.
Now that you know what to do when you receive your tax refund, it is vital to understand how long it will take to receive it.
Factors that Slow Down the Tax Return Process
The process to receive your tax refund on the federal tax returns filed typically takes 21 days if you electronically file them. However, there are some instances where it would take longer to process tax returns.
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For example, if you filed a paper return, your refund status will take additional time to change, and the IRS will send you a check. It would take longer because the necessary information will take time due to the required tax information being transferred via the mail courier system.
Inaccurate Information on Tax Returns
The IRS has a tax system to expedite the tax return process and help people receive their tax refunds quicker. However, if there is information filled out incorrectly, this will trigger a manual review and cause the filing status of the filer to not change for a prolonged period. Thus, it is important to consult a tax professional when filing your tax return and ensure that all information is filled out correctly.
Not Keeping the Necessary Tax Documents
One additional cause that has slowed some of their tax return processes down is the lack of relevant documents. For example, the IRS sent letters out regarding the Advanced Child Tax Credit and Recovery Rebate Credit. Suppose the recipient of the letters threw out these documents. In that case, it could delay the filer’s tax return process as they do not have the necessary documentation to provide accurate information on their tax return.
How to Expedite the Tax Return Process
File Information Correctly
As mentioned before, the IRS uses tax software to identify certain returns that may require further investigation. When information is filled out incorrectly, it may trigger a manual review, which will delay the duration of the tax return and lower your chances of faster returns. Thus, it is crucial to double-check the information to ensure its accuracy when filing returns.
Opting in for Direct Deposit
When the IRS wants to issue the tax return, they use the applicant’s information on hand to determine how they will give their refund. If the applicant does not have a direct deposit set up with the IRS, the IRS is forced to mail a check, which will take longer. Therefore, it is important to choose direct deposit as the preferred method of receiving the tax refund as it will take less time for the money to come through.
CapWay Pro Tip: If you do not have a direct deposit account, open a Money Account with CapWay today. CapWay account has no hidden fees, and you can sign up for a direct deposit.
After filing taxes, getting paid by the government is a great feeling as you receive additional cash that could be used however you wish. However, it is crucial to have a mix between spending money for yourself and investing in your future. This mixture will allow you to enjoy yourself and improve your future financial status.
What are some other ways you can use your tax refund money productively? Please share your thoughts with us in the comment section below.
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