University of Wisconsin - Extension

Many of us hustle this time of year to get our taxes together, especially if we're expecting a refund. But a University of Wisconsin-Extension family financial management specialist asks, have you planned how you will use your tax refund?

"Using your refund to pay off bills is generally a great idea, especially if the bills carry a high interest rate," says Linda Boelter, Certified Financial Planner.

"Do you carry a balance on your credit cards from month to month? The average credit card debt for card holders with a monthly balance is $3,000. At 18 percent interest, you must pay nearly $300 a month to pay that off in a year. With lower monthly payments, it will take even longer to pay off the debt, resulting in increased interest charges."

Boelter says using that tax refund to pay down your credit card balance will help you pay off the debt faster ? and save a lot in high-interest finance charges.

"However, instead of paying off early on a low-interest loan, consider making additional investments for retirement. That strategy may gain you more in the long run."

Boelter suggests using your tax refund to make an annual IRA contribution. A Roth IRA is particularly attractive because while the contribution is not tax deductible, the money is tax-free at retirement.

"The sooner you begin saving for retirement, the more time your money has to grow and the bigger your retirement fund will be," she says.

Before you are tempted to use your refund to make any special purchases, Boelter says it's also a good idea to ask yourself how your emergency savings fund is doing. If you don't have some money available for unexpected expenses, then every unplanned expense ? such as a medical bill, home maintenance or car repair -- becomes a source of serious stress and possibly a source of new debts.

"Work toward having enough emergency savings to get you through a month if your income was cut off," Boelter says. "If you already have that in place, then build additional savings that could be easily available through a higher-interest method, such as a good money market fund or a series of certificates of deposit, laddered so you have one coming due every month or two. That way, you will have access to some money without having to pay a penalty for early withdrawal."

Lastly, Boelter says a tax refund is not a windfall. It means you have been overpaying your taxes all year--giving the government free use of your money. If you regularly get a large tax refund, check with your employer about adjusting your withholding. That will put more money in your paycheck each payday or let you increase your contributions to the 401(k) or other retirement savings plan.

For more information on paying down debt, establishing emergency savings or investing for your retirement or other long-term financial goals, contact your County UW-Extension Office about enrolling in "Money 2000 and Beyond."