How to Efficiently Utilise Your Tax Refund

Posted 3 years ago in BUSINESS.

If you want to utilise your tax refund efficiently, you can use this money for various purposes. This blog discusses some of them.

How to Efficiently Utilise Your Tax Refund

Have you got a tax refund earlier? How did you utilise that money? Studies suggest that about 40% of the recipients use this money to cover their basic expenses. You can utilise your tax refund in various ways, but many of you treat it as spare money and do fun with it.

There is nothing wrong if you want to use a portion of this money for fun, but it does not make sense to do so when your current financial condition is not good at all. For instance, if you have a couple of outstanding debts, you can use this money to pay them off.

You can also stash it away for a rainy day. Financial emergencies never knock at the door before they crop up, and most people feel the pinch when they need money urgently. If you have money in the emergency corpus, you can avoid chasing lenders to borrow money. Here is how you can efficiently utilise your tax refund.

Settle your debts

It will be a good idea to use the tax refund to pay the high-interest debt. If you have a mortgage or an auto loan, you may decide to put this money toward them. It can help you relieve some debt burden, but the settlement of credit card bills can help improve your credit score.

This is because the utilisation of debt out of available balance accounts for 30% of your credit score. If your debt-to-income utilisation ratio is over 30%, you can minimise it using a tax refund.

Catch up on late payments

If you fall behind the payments, you will end up paying late payment fees and interest penalties. If the payment is 30 days past due, the lender will inform credit reference agencies of your credit report. This will, unfortunately, ding your credit rating and restrict your chances of borrowing money at affordable interest rates.

If your credit history is good, a payment that is 30 days past due can pull as many 100 points as possible. If your credit file is already blemished, it will not considerably hurt but still do some damage. This is why it is always wise to use the tax refund to catch up on payments.  

Build an emergency cushion

Even though you have saved three-month worth of living cost, there will always be a scope for contributing to your emergency corpus. The more money you have in your savings, the better. A rule of thumb says that you should financial emergencies can catch you up anytime. Sometimes you may need a large amount of money, and your savings fall short.

Although there are loans like Provident to help you tide over, it can be quite tricky to get them signed off if you have already taken on debt. This is because it hurts your credibility. A lender will assume that you may struggle to keep up with payments on time. This is why it is recommended to contribute this spare money to your emergency cushion.

Invest money

If you have no debt to pay off and no payments to catch on, you may think that you can utilise this money for entertainment and fun, but wait. You can use this money to invest. Letting the money idle will reduce the value of your money. Therefore, it is suggested to invest your money.

Since you are going to dip your toe, you should take the help of an investment expert. They can understand your financial condition and investment needs before suggesting to you the type of assets. Do not forget to calculate your risk tolerance capacity. It is defined as the amount of money you can afford to lose entirely if the market does not work as per your expectations.

Try to build a diversified investment portfolio. It should have a mix of stocks, bonds and mutual funds. The combination of high risk, moderate risk and low-risk assets can make your investment portfolio impressive. An investment expert can suggest you the right combination of assets.

If you have got a tax refund, you can utilise this money in various ways. Although you can spend it on recreational activities, it is wise to use this money better. You can put this money toward emergency cushion, debt payments, investments, and late payments.