Do you have a plan for your tax refund?

March 31, 2011|Lynn Little

A tax refund is always a welcome bonus. Whether its $300 or $3,000, the way you use that money can have a real impact on your personal and financial well-being.

Plan ahead before spending your tax refund. Without a plan, you may use the money on the first thing that comes to mind and later realize something else was more important.

Try to think about all your options, even ones that aren't very glamorous. Planning ahead and involving the family increases the chances you will identify all the possibilities and think about which are most important. Ask yourself:

Do I have outstanding or past due bills?

 Am I carrying a balance on my credit card?

 Can I use the refund to clean up last year's holiday bills? Should I set aside part of it to eliminate holiday bills this year?

 Do I have a big expense, such as property taxes, an insurance premium, loan payment or major car repair coming up?

 Do I have adequate emergency funds set aside?

Consider using your tax refund or a portion of it to pay down debts starting with the highest interest rates first. If you owe $2,000 on a credit card charging 24-percent interest and only make the minimum payment each month, it will take more than five years to eliminate the debt. If you have one or two smaller debts, you may get more satisfaction from paying them off in full. This will free up money to increase your monthly payment on the higher interest debt.

Do you have an emergency fund? Three to six months savings is a goal recommended for an emergency fund, but one that may not seem easily attainable. Use part of your tax refund to start or build your emergency fund. Try to continue putting away $5 or $10 a week to increase your emergency savings.

Consider using your tax refund or a portion of it to start a special savings fund to help pay those big bills, like insurance and taxes,  that may only come once a year or once every few months. Avoid problems with those bills by being ready for them by continuing to add to those savings throughout the year.

Devote a portion of your tax refund to building long-term financial security by contributing to your retirement account or IRA (Individual Retirement Account).

People sometimes think of a tax refund as forced savings, yet, in reality, you have provided a loan to the government without earning any interest. Adjust your tax withholdings and create a savings account that will earn interest.  

Still feel the urge to splurge? After paying down debt and adding to savings for short- and long-term goals, use a small amount for something you and your family will enjoy.

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

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