Tax Time: A Perfect Time To Make Financial Resolutions

We typically associate making big life changes with the new year. Whether we’re committing to a personal change like recovery or deciding to cut out that morning latte to save money, people reevaluate things around that January 1st deadline.

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New Year’s resolutions are a good strategy, an appropriate time to get a fresh start on things, but there’s another appropriate option available, particularly for financial health changes. That other option is tax time. Since doing your taxes gives you a lot of insight into your overall financial well-being, it can be a good time to decide something needs to change.

Interested In Investing?

While filing your taxes, are you seeing a noticeable lack of investments? Investing in stocks or bonds can be a good way to make your money work for you. But it’s also important that you set limits so that you don’t invest beyond your means. New investors are sometimes over-confident, so start slowly. You might also consider that your success will be greater if you work with a broker and don’t invest on your own using online brokerage systems.

Review Your Withholdings

When you get your paycheck, the IRS gets a part of the money in taxes. That money is then taken into account when your taxes come due in April. If you see that you’re getting a large tax return at the end of the year, that means the IRS is taking out more than you owe them. You can adjust your withholdings to change this.

By reducing your withholding, you also reduce your refund, but you make those funds immediately available each month for other purposes, rather than receiving it all at once when your taxes are complete. Assess your goals and determine whether getting a small amount more each month would be easily wasted or whether it could be put directly into savings or other productive uses.

Downgrading Debt

Tax time is also a good time to review your debt levels. Do you have a pile of student loans that you’re trying to get rid of? Too many people see their tax return as a kind of gift, splurging where they could be putting the money to good use to reduce their debt load. Try to reframe how you think of this sudden windfall and act responsibly. It may be less fun, but not having a pile of loans is also pretty enjoyable.

Look To The Future

Another good way to use your tax return is to open an IRA to prepare for your retirement. Having this money set aside will benefit you in the long term, but it will also help you next tax season. Special rules apply to your IRA and putting money aside is a good way to offset some later tax expectations.

No matter what financial goals or changes the tax season helps you set, it’s important to consider your priorities. If you already have a great emergency fund, then maybe you feel your responsibility in that regard entitles you to do something fun with your return. Ultimately, no matter what you choose, you want to come away feeling like you spent your tax return in a way that feels right.