Future needs
Establish an emergency fund. Having an emergency fund can get you through small emergencies like car repair or medical bills without breaking a sweat. In the ultimate emergency (loss of income), an emergency fund can keep you afloat until you find another income source. Use part of your tax refund to start or build your emergency fund.
Another use for your tax refund could be to start a special savings fund for those occasional bills that come once a year or every few months. These bills often cause huge problems for families. Avoid those problems of occasional expenses by being ready for the bills. Use your tax refund to start a special savings fund, then keep adding to it throughout the year.
Try long-term savings
You can make progress toward long-term goals, and your tax refund can help make that happen.
Adding just $500 a year into a retirement account such as an IRA can make a difference over a period of decades. Earning an average annual return of 9 percent, a contribution of $500 per year would yield $68,100 after 30 years. Build on the momentum created by that once-a-year contribution, and make a monthly contribution too. If you contribute $500 per year and $25 per month, earning a return of 9 percent, in 30 years you will have $113,800.
Moderate-income workers who contribute to their retirement accounts might qualify for a tax credit. For example, a married couple filing jointly with earnings of $32,000 would qualify for a 20-percent credit. That means that if they contribute $2,000 to retirement accounts, they will receive a direct tax credit of $400. Consult with the IRS for details.
Make special purchases
This could be the time for a new computer. New recliner? Nice vacation? What about that new refrigerator? Or the sofa? These purchases are valuable and some might be essential, while others simply add enjoyment to life.
Your best bet: First put some of your tax refund toward financial security: Then use part of your tax refund to make your day-to-day life better. Among all the items on your "wish list," choose the most important and shop wisely for it.
Spread the wealth
A large tax refund seems like a great idea, but that isn't always true.
You could be investing the money and earning interest throughout the year. You give up that interest income when you let the IRS keep your money for several months.
You could save money on late fees or finance charges if you had the money in your paycheck throughout the year. If you paid a $5 late fee on your utility bill six different times throughout the year, that's $30 you could have saved by getting your tax refund in your paycheck rather than waiting till the end of the year.
If you would like to get your refund money throughout the year instead of waiting, change your Withholding Instructions on Form W-4. If you receive a large refund, it might be because you claim too few exemptions. Talk with your payroll office at work about this.
If you have children and qualify for the Earned Income Credit, you can request to receive part of it throughout the year. Check with the IRS for qualifications and your payroll office for the forms.
Tax refund season is not your only opportunity to make financial progress toward your goals. Every week you have opportunities to improve your financial well-being. If you don't think you can come up with any extra money each month, look again. You might be able to plug a few spending leaks and "find" some money. Once you've found some extra funds, you can use that money to keep bills paid; pay off debt early; build financial security and keep saving - whether you're saving for retirement, college or something else.
Lynn F. Little is a family and consumer sciences educator with Maryland Cooperative Extension in Washington County.
