Best Ways to Spend Your Tax Refund
Strategic spending trumps splurges, Stroh says
SAN MATEO, Calif., April 4, 2007 - Each spring, thousands of Americans receive income tax refunds from the U.S. government, with the IRS expecting an average amount this year of $2,548 -- and each refund is a ticket to better financial planning, says Brad Stroh, co-CEO of Bills.com (www.bills.com), a free online consumer portal. "Many tax refund recipients dream of ways to spend that cash. But before getting carried away in a spending fantasy, think long term," Stroh advised. "A tax refund is not really a windfall, but a return of your own money to you. Tax refunds are a forced savings plan from the IRS … not a gift. That shift in your mind may make it less likely that you will squander the refund." Once consumers understand the source of their tax refund, Stroh suggests the following ways to wisely spend an income tax refund:
- Pay down credit card and other high-interest debts (including payday loans). The average household carries a total of 14.9 credit cards. The average interest rate on these cards is 14.24 percent, but there are no usury laws for credit card debt: One missed credit card payment can send interest rates skyrocketing to over 30 percent. About 20 percent of all credit cards are "maxed out" by their owners. Get a free, detailed Budget Guide from Bills.com at http://www.bills.com/guide/ or follow these basic steps to make a debt-payment plan:
- List and pay secured debts first (mortgage, car). Mortgage payments should take absolute priority.
- Then list unsecured debts (credit cards, loans) in order of highest interest rates.
- Make minimum payments on all but the highest-rate card. Use every cent of available income to make large payments on the card with the highest rate.
- When that card is paid off, apply the big payment plus the old minimum payment on the next-highest rate card until it is paid off. Continue until all debt is eliminated.
- Fund an emergency fund. An emergency fund should include 6-9 months’ living expenses. These amounts, explained Stroh, are not necessarily equal to salary. Instead, they should include only what the household would spend if it were in dire straits. House these savings in a money market fund or rolling CDs so that the money earns interest and cannot easily be spent -- but can be accessed in an emergency.
- Obtain adequate insurance. "Everyone should have health, auto, and home or renters insurance," Stroh said. If dependents rely on breadwinners' income, look into life insurance. Consider an umbrella policy to protect from additional liability. And if the household could not survive without an income, purchase disability coverage. Learn more at http://www.bills.com/insurance/.
- Fund the future. Contribute to retirement savings, whether an individual or Roth IRA, 401(k) or other plan.
- Invest in the home. Homeowners might consider using refunds to cover major or minor maintenance to make sure no bigger (and more expensive) problems arise down the road. In addition, these capital improvements can create additional equity in a home.
"Most importantly, make sure you use that money to pay off debt and build wealth -- not for flashy things that will end up in the trash in 12 months' time," Stroh advised." Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com and its partner company, Freedom Financial Network, have served more than 10,000 customers nationwide while managing more than $350 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.