YOUR TAX REFUND: WHAT TO DO
Michigan Credit Union League - Your Money Matters
If you're like the many millions of Americans who are expecting a tax refund this year, you have probably already made a list of the numerous ways you could spend it ? new furniture or maybe a vacation?
You may even know of some people who complete their income tax forms, see the bottom line, drop it in the mail and head for the mall ? credit cards in hand. However, there are a few things you might want to consider before you spend the cash that's not yet yours. Your return could be used to improve your financial health. How?
PAYOFF OUTSTANDING CREDIT BALANCES
For starters, use your tax return to pay off any outstanding credit card balances. Most credit cards charge high interest rates of 18 percent or more, stealing the dollars you worked so hard for. Using your refund can be the first step toward erasing your credit card debt - a goal you can aim to reach by the end of the year.
START A RETIREMENT PLAN
You could begin contributing to a 401(k) retirement plan if your employer offers one. Or, you could take advantage of an IRA or Keogh. As this column addressed last week, IRA contributions accumulate tax-free until the time of withdrawal, making this option an excellent place to invest your tax refund. If you are self-employed, you could open a Keogh plan which offers many of the same advantages as an IRA. Taxes in these plans are deferred on contributions, interest and dividends.
START A COLLEGE FUND
If you have children, the time for post-high school education will come sooner than you expect. You may want to consider placing the money in a stock mutual fund for your child's college tuition if they are young. If you have older children, already in high school, your credit union or other financial institution may offer a variety of short-term certificates of deposit (CDs) or money market accounts.
PLAN AN EMERGENCY FUND
A common rule is that you should have an emergency fund amounting to six months worth of living expenses. Even with today's economy booming, you can never anticipate a spouse losing an income due to an injury. Make sure you have enough funds saved to cover yourself should something happen.
SAVE FOR HOLIDAY SHOPPING
Christmas, already? Yes. Even though Christmas wasn't that long ago, you could start thinking about this year's shopping and set aside your refund for presents. Many credit unions and other financial institutions offer Holiday Savings Clubs that allow you to withdraw the account's balance only once a year, usually as the holidays approach. Or, if you start purchasing gifts now and continue throughout the year, you will be able to shop at your own pace, find items on sale and avoid over-spending on over-priced, impulse gifts during the holiday season.
HAVE A LITTLE FUN
Finally, you may want to spend a portion of your return on something you've been wanting for some time. But, save the rest. This way you can have extra money saved and still feel good about your new furniture or weekend getaway.