Financial Tips

Spending Your Refund Doesn't Need to be Taxing
--Our CCCS agency Credit Counselors' Top Five Tips for how to spend your income tax refund

Spring flowers are blooming, the weather is warming up and you find a sizable check in your mailbox-it's a good day! This year the average tax refund is expected to be over $2,500. After cutting costs and struggling to get through the recession, it's tempting to spend the windfall on a "want" versus a "need."

But when jobs are scarce, home equity is low, and the recession lingers, it just doesn't make sense to blow such a large chunk of change. Figuring out the best way to spend the money isn't difficult and doesn't require a costly financial planner. The credit counselors at our Consumer Credit Counseling Service (CCCS) agency offer a few suggestions on making the most of your refund.

Save it for emergencies.

Outdated financial advice can leave you short of cash when you need it the most. In the past, experts have recommended that we set aside three to six months of living expenses to cover unexpected expenses. At times of high unemployment, that rainy day fund needs to cover a year or more of expenses. In 2009, it took the unemployed an average of 31 weeks to find new a job.

Layoffs, dead refrigerators or hot water heaters, or a dog with a broken leg are inevitable--no one can avoid money emergencies--they are a fact of life. We can, however, prepare for them rather than scrambling to borrow money or run up our credit cards. High interest credit card debt is one of the most expensive types of loans, although payday loans are often worse. Paying that debt in minimum installments will make matters worse by costing you double or triple the original amount.

Address credit card debt.

Paying down high-interest credit card debt will give you more bang for your income tax refund buck. It's usually best to pay down your credit card with the highest interest rate. The exception is if you have a credit card with a relatively low revolving balance of $2,500 or less. The motivation to pay off debt can generate momentum that fuels faster payoff and savings. Paying off one credit card can lead to an opportunity to pay more than the minimum payment on other cards.

Build your retirement account/s.

Traditional IRAs offer the benefit of being able to deduct your contribution from your taxable income in the following year. Contributing to a Roth IRA is something to consider if you want to be able to withdraw the funds in retirement without having to pay interest. Over time, with either IRA, compounding interest will help your initial investment to grow.

Perform car or home maintenance.

Your car may be your most vital link to your job. Is it due a tune-up? New tires? New brakes? Make regular car maintenance a priority for safety and savings.

The same thing applies to your home. Many people put off preventative maintenance on their homes, since it never seems like a "good time" to take care of it. Yet procrastinating can cost you much more in the long run. For instance, if you get leak due to your gutters overflowing, replacing rotten wood or dealing with a flooded basement will cost much more than hiring someone to clean them (that is if you don't want to do, or haven't gotten around to clearing them out yourself). Insulating your attic or installing a low-flow toilet will also save you money in the long term and add value to your home.

Brainstorm how to be fun and practical.

Since we want to enjoy some of the money, what can we buy that would fulfill both needs at once? Consider buying a new, professional, and quality outfit for work. Enroll in a class that could enhance your career skills or help start an income-generating hobby. Hire a career placement expert to review your resume and spiff it up so you can compete in this tough market place. Because there are so many possibilities, you will need to be creative.

For a free credit counseling session in person, over the phone or over the Internet, please call (888) 656-CCCS or visit www.credit-counselors.cc.