Good Question: Ways to use your tax refund wisely
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Question: I will be receiving a significant tax refund. What's the best use of the money?
Answer: The tax season is in full swing and now is the time to think about how you will use your tax refund. It may be tempting to splurge on a vacation or big-screen television, but you might want to consider putting the money to better use.
When deciding how to use your tax refund, first consider any outstanding debt you may have and think about putting the extra money toward paying down debt. If there's one bill you can eliminate completely, you might want to consider paying it. If you have several debts, think about putting the money toward the debt with the highest interest rate.
Now is also a good time to check your credit report (www.annualcreditreport.com). Maybe there is an old collection account that you've forgotten about or a debt you haven't paid. If that's the case, consider using your tax refund to clear up some of the items on your credit report.
If you do decide to pay off an old account, make sure you document the payment made. Contact the collection company to ensure it still holds the account and to verify the address where the payment should be sent. Make a copy of the check and retain proof when the check is cashed. If you receive a letter saying the debt has now been paid in full, keep the letter and the canceled check or bank statement together in a safe place, just in case the debt resurfaces on your credit report down the road.
It's also a good idea to evaluate your emergency fund. A tax refund can be a nice boost to an account where you are setting aside funds for unexpected expenses. Financial experts typically recommend setting aside three months of living expenses, which usually is a significant amount of money. However, you have to start somewhere. An emergency fund will prepare you for unexpected expenses and may help you avoid using a credit card in emergencies.
If you decide you want to use your tax refund to treat yourself with a special purchase, consider setting half of the money aside and using the other half as you like. Spending only half of the funds will still allow you to make a special purchase, but will also allow to provide yourself some extra protection in case of an emergency.
If you are going to save the money for something specific, it's always a good idea to identify financial goals and to track your savings progress. When setting a savings goal, it's important to identify what you're saving for, how much you want to save in total, how long it will take accomplish it and how you're going to get there (i.e., save $50 a month for one year). Tracking your savings makes you much more likely to reach your goal. As you see your savings build, you're more motivated to continue to save and may find other ways to increase your savings. (Try the new savings goal tracker at the agency's free site, www.onlinebudgetadvisor.com.)
The tax refund sometimes eases the pain of filing taxes, but it's always important to put the money to good use and if you can, ease some financial burden.
First Published March 10, 2013 12:00 am