Although most people don’t enjoy filing their taxes, a sizable tax refund can be a welcome relief. The best gift many folks get each year is their tax refund. The typical tax refund in 2022 was nearly $3,000, demonstrating that it can amount to a sizeable sum of money, Entrepreneurng report.
A tax refund that substantial feels like it was provided as a present to accelerate your efforts after months of slowly reducing your credit card debt. Although it may be tempting, it might not be your best long-term financial choice to apply for that money directly to your debts.
Before paying off your debt, you should consider these warning signs:
1. Your emergency savings are nonexistent.
You need an emergency fund if your long-term objective is to eliminate your debt. When unplanned expenses arise, having extra cash prevents you from accruing more debt. It also prevents you from returning to debt after you have paid it off. This is a fantastic time to open a high-return savings account and start it with your tax refund if you don’t already have an emergency fund.
2. You have a lot of upcoming expenses to cover.
It is simple to picture the instant gratification you’ll have by paying off all of your debt once you have your tax refund in hand. Nevertheless, what would you say is as satisfying, if not more so? I feel ready for future expenses!
Perhaps you have a trip coming up for which you haven’t begun saving, or perhaps your car’s tires need to be changed quickly. These costs will probably be charged to your credit card if you don’t have money put aside for them. Hence, instead of using your entire refund to pay off debt, save aside the funds you’ll need for these anticipated costs.
3. The underlying factors causing your debt are not being addressed.
Using your tax refund to pay off debt will only bring short-term relief if you haven’t already identified the factors that are fueling it and begun taking action to change them. You don’t need to be flawless, but you should have started to make a conscious effort to change the patterns and behaviors that led to the growth of your debt.
If you haven’t, there’s a significant risk that your balances will start to rise again and you’ll get much more demoralized than before. Save that cash instead and begin the internal work while you do so.
Don’t assume that using your entire tax refund to pay off debt is the best course of action for you financially, even if your credit card interest rates are sky-high. Yes, you will save money on interest, but it may also make it more difficult for you to get out of debt and keep it off. Hence, when the generous refund comes in, think about saving part of it first!
