Good Question: Smart uses for tax refund

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Question: I'm expecting a significant tax refund. Do you have any suggestions on the best way to use it?

Answer: When it comes to extra money in your pocket, the first impulse is to spend it. However, now is a good time to assess your financial situation and see what makes the most sense for your tax refund. Here are some ways to put the money to good use.

First, pay off some bills. Do you have credit card bills that you're putting a couple hundred dollars to every month? Why not use your tax refund to pay off some or all of the debt? If you're paying $200 a month toward one or more bills, using a tax refund to pay it in full will save you $2,400 in a year's time. Check your credit report (www.annualcreditreport.com). Are there any collection accounts on there that you could pay off with the refund? Paying off collection accounts on your credit report may help increase your credit score.

Start an emergency fund. Open a savings account and put the refund in there for when the unexpected happens, such as a car or household repair. Having an emergency fund will keep you from using a credit card when something costly occurs.

Start a retirement account. If saving for retirement is something you have yet to commit to, use your tax refund to start a retirement savings account and make a commitment to put money toward it throughout the course of the year.

Assess your home and your car. Will anything expensive need to be replaced this year? Plan ahead for some of these expenses by setting aside money to help cover these costs.

Take a look at your monthly budget. Are there any periodic expenses you could get ahead on with your tax refund? Maybe you can pay off some insurance costs in advance instead of making periodic payments. The same could be said for tax payments. Paying periodic expenses in full may end up saving you money by avoiding the fee usually tacked on for installment payments. If you have children, set aside some of your tax refund to go toward activity fees.

Think back to the holidays. How much did you spend on holiday-related expenses in November and December? Open up a Christmas Club account with your tax refund and come this November and December, you'll be prepared.

Splurge sensibly. If you're considering putting your tax refund to an expensive vacation or a purchase such as a big-screen TV, wait at least a week before spending the money. It will give time to assess if it's really how you want to spend your tax refund. If a splurge is the way you plan to go, set aside at least half of the money toward an emergency fund. That way there will be some left if you really need it during the course of the year.

Heather Murray is Manager, Regulatory Compliance and Education for Advantage Credit Counseling Service (dba Consumer Credit Counseling Service); www.advantageccs.org or to access the free online budgeting tool go to www.onlinebudgetadvisor.com. Email Ms. Murray at hmurray@advantageccs.org.


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