Tax refund can boost financial health - or be wasted

March 03, 2006|by LYNN F. LITTLE

A tax refund is always a welcome bonus. Whether it's $300 or $3,000, the way you use that money can have a real impact on your personal and financial well-being. Tax refund dollars should not be considered free money or a gift. Your refund dollars have been earned, taxed and provided by you to the government as a no-interest loan.

Before you spend your tax refund, try to think through all the options - even the ones that aren't especially exciting or glamorous.

Do plan ahead before spending your refund. Without a plan, you might use the money on the first important thing that comes to mind and then later realize something else was more important. Planning ahead and involving the family increases the chances you will identify all the possibilities and think about which are most important.

Review what you owe. Check outstanding bills and prioritize payments. For example, pay past due rent or house payments, utility, medical bills, etc. If you can't pay them all, pay what you can and negotiate a payment plan.


If carrying a balance on credit cards, pay down the card with the highest interest first, but remember to also meet minimum payments on other cards to avoid late or other fees.

Paying down credit cards and reducing or eliminating interest charges frees money to meet other expenses.

Some financial aspects to consider:

  • Anticipate expenses. Consider events coming up in your life that will stress your budget. Are you expecting a baby? Do you have a child entering a new phase of his or her life, such as going to camp or heading off to college? Are you planning a vacation? Or would you like to replace an aging vehicle? Anticipating expenses and building short-term savings can eliminate the need to borrow money or run up a credit-card bill that will need to be paid with interest.

  • Devote a portion of your tax refund to build long-term financial security. Set aside refund dollars for long-term savings and investments. Use the refund dollars to jump-start savings for a down payment on a house, build an emergency fund or boost retirement funds with an Individual Retirement Account (IRA).

    Don't throw away part of your refund on loan fees. Did you know that those companies that offer "quick refunds" are just giving you a loan? Wait, rather than apply for a refund anticipation loan, which is really paying to borrow your own money.

    Treat yourself, but do your homework before spending. Spending part of a tax refund to make a dream - new furniture or electronics - a reality is a possibility, but it's best to consider debts and needs before making discretionary purchases.

    If you received a substantial tax return, $500 to a $1,000 or more, you might consider meeting with your payroll department to adjust deductions. Doing so can reduce a future refund but increase your take-home pay that you can use throughout the year.

    Filing taxes electronically will speed a refund. Filing early, before the April 15 rush, also is likely to shorten the waiting time for a refund.

    Paying off bills, saving for needs for the coming year, long-term savings and special purchases are all great uses of your tax refund!

    Lynn Little is a family and consumer sciences educator with University of Maryland Cooperative Extension in Washington County.

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