Do you have a plan for your tax refund?

April 04, 2013|Lynn Little

Each year around tax time, many of us anticipate an income tax refund.

A tax refund is not free money or a gift from the government. It is the return of earned income to you. Whether your tax refund is $500 or $3,500, it can mean an impact on your personal and financial well-being. 

Before you spend your refund on a flat-screen TV or an iPad, get the most out of your tax refund by developing a plan. Make a commitment to enjoy part of the money. Be smart, and use the rest for practical purposes. Allocate 80 percent of your refund for "smart uses" and the remaining 20 percent for enjoyment or to make a special purchase. 

Consider the following smart uses to improve your finances:

  •  Pay off bills. First priority would be regular monthly bills if you have gotten behind. Pay down credit card debt, paying the ones with the highest interest rates first. This will save you money and help reduce your debt faster. Credit card debt can be hard to pay off when making only the minimum payment because most of the payment goes to interest. Reducing credit card debt will improve your financial security.

  •  Save for needs in the coming year. Open an emergency savings account to provide funds for unexpected expenses. When the tire goes flat, the car battery needs replacing, or the washing machine breaks, money in an emergency account will help you pay these expenses without going into debt. Try to have enough to cover several months should you have an emergency, such as a medical expense, car repair or lose your job. An emergency savings account can help you stay out of debt or keep credit balances from growing while you pay off the credit account. An emergency savings account is an important tool to help you stay on track to reduce and eliminate debt.
  •  Save for occasional expenses such as holidays and birthdays, by setting aside money for holiday and birthday gifts. Make an additional deposit into a savings account or open a new one especially for this purpose. Then make regular additions to the account.  By building savings now, you can avoid creating new credit card debt when those special events occur.  This helps you on the way to stress-free holidays and birthdays, and other special occasions.
  •  Save for goals such as a dream vacation, home or retirement. Open or contribute to an IRA. A modest deposit can make a substantial impact on your retirement account.
  •  Pay extra on your mortgage. The amount extra you pay goes reducing the principal and can make a big difference over a period of time.

 If you spend most of your tax refund on "smart uses" you identify, reward yourself and spend it just for fun or make a purchase you have delaying.

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

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