Get the most BANG for your BUCK with your Tax Refund or Bonus
What's the best way to use a tax refund or bonus?
The answer depends on your individual financial situation. Once you have a monthly
spending plan (budget) in place, you can decide if you would benefit the most by...
- Reducing monthly fixed obligations by paying 12 months in advance
- Applying the funds to reduce credit debt balances and monthly payments
- Building a savings account
1 - Pay Monthly Fixed Obligations:
If you tend to run out of money before all of the bills are paid, you may benefit by utilizing the refund or bonus income to temporarily eliminate some ‘fixed obligations’.
Many households spend a majority of their income on basic housing, utilities, vehicle payments, insurance and other contracted obligations that all require a monthly payment. Could you benefit by eliminating one or two of the monthly payments from your bill-paying process? If so, consider making the required payments for 12 months in advance, to eliminate the monthly obligation until the next anticipated tax refund or bonus is received.
Which monthly FIXED obligations can you pay for 12 months in advance, until the next cash bonus is received? Property taxes? Car insurance? Car payment? Cell phone? Life insurance? Student loan? Gym membership?
How much can you save monthly?
2 - Reduce Credit Debt:
If you have a workable spending plan with sufficient income to pay all living expenses and contracted obligations, you may be in a position to reduce your credit debt by paying-down or paying-off credit accounts. This could reduce or eliminate the monthly payments and interest accrual inherent with credit accounts.
If your goal is to reduce the ongoing monthly payments paid to credit debt in an effort to “balance your budget” and have more money available for living expenses, run the numbers.
Project payment reductions using a 3% calculation. For every $100 paid-down on a credit balance, your minimum monthly payment will decrease by approximately $3.00. Therefore, if you pay $1000 toward a credit balance, you may realize a $30.00 monthly payment reduction; $2000 equates to $60, etc…
How much can you save monthly?
Compare options #1 & #2: to understand how each impacts cash-flow as well as monthly bill-paying advantages. You might find you get more ‘bang for your buck’ with option #1, when you need it most.
Example: Tax Refund amount = $2400.00
#1: Pay Monthly FIXED Obligation(s):
|#2: Reduce CREDIT debt/payments:|
|= $185.00 monthly reduction
$180.00 remaining from refund!
|= $75.00 monthly reduction
$0.00 remaining refund
Short-term vs Long-term:
One should also compare the short-term versus long-term benefits of each payment option.
- Paying monthly fixed expenses eliminates the monthly payment from the budget for 12 months and assumes that a refund or bonus of at least the same amount, will be received in order to repeat the process for the next year’s obligations. This is a short-term endeavor, generally with greater financial impact for the immediate monthly bill-paying process. With some expenses pre-paid and eliminated from the monthly payment structure, there should be more income available to distribute to other living expenses, credit accounts or a structured repayment plan.
- Paying-down or paying-off credit debt has long-term benefit implications towards the ultimate goal of being debt-free. For credit-reduction payments to have the intended impact for the long term, use of the accounts should be limited to amounts that are payable, in full, each billing cycle. Avoid increasing the balance or carrying a balance after applying the reduction funds. Impact and benefit are lost if shortly after applying the funds, the credit account is used to support living expenses or emergency needs.
3 - Build a SAVINGS:
Utilize a portion of the refund/bonus by setting aside funds for repairs, maintenance, medical costs or other or expected expenses. In addition, save for the unknown, too, by building an emergency savings account.
In the previous example/comparison, option #1 reflected $180 remaining after pre-paying 2 monthly fixed expenses for 1 year. If left untethered, those funds could be absorbed into everyday life and spending and simply disappear; but if put in a savings account for specific applications such as vacations, a new car,
vehicle maintenance, home maintenance or a special purchase, they can have a more focused and tangible impact.
If you are not hindered by excessive credit debt or a budget-deficit situation, use this opportunity to build your savings opportunities. For additional suggestions about SAVING, ask your counselor for a copy of the FamilyMeans Financial Solutions - Savings Booklet.
Prepare for catastrophe
It’s important to prioritize your living expenses and plan for a certain amount of hardship or catastrophe. If you are concerned your income might reduce or layoffs are imminent, consider focusing a tax refund or cash windfall on your priority obligations, such as mortgage payments, vehicle loans or insurance premiums. By paying these items in advance 1, 2 or 3 months, you will reduce financial stress and immediate concerns about basic needs if the worst occurs.
Paying in advance
To pay in advance on some loans or accounts, you may need to include monthly payment coupons or specify your request to ‘advance the payments’ with a company representative. Sending a lump sum payment without instructions to ‘advance the due date’ may simply reduce the principal balance of the debt, and the monthly payment would be expected the following month.
Not sure where to start budgeting? Contact FamilyMeans today and set-up an appointment with a Financial Solutions Counselor by calling 651-438-4840 or visiting www.familymeans.org.