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11 Ways to Spend Your Tax Refund

OK, the headline of this article is admittedly a bit deceiving. You
probably think it means 11 fun ways to blow your tax refund: a
plasma-screen TV, a vacation, hundreds of lottery tickets or a
shopping trip to the mall. But you’ve lived all year without that
money, and there are more useful ways to “spend” your refund.

With lower federal tax rates instituted in 2003, households are
expected to receive larger-than-normal refunds in 2004.
And if you’re like many Americans, you’ll spend most or all of that
refund instead of saving it, investing it or paying down debt.

A survey in 2003 by the Cambridge Consumer Credit Index
found exactly those results. It asked taxpayers in February 2003
what they anticipated doing with their refund assuming passage
of President Bush’s bill to cut taxes. At the time, 28 percent
planned to put the money in a bank account, 23 percent were
going to pay off bills, 19 percent were
going to pay off credit cards, 9 percent
were going to spend it on “everyday
items” and 6 percent were going to
invest their refund in stocks and bonds.

The survey followed up in December 2003 to see how taxpayers actually spent the early refund checks they received
after Bush signed the tax act in May
2003. Only 18 percent put their money
into a bank account, 33 percent paid
off bills, 20 percent spent the money on
everyday items, 15 percent paid off credit cards and only 2 percent invested their money.

After many frustrating hours spent slaving
over your taxes, the payoff has finally
arrived. Amongst the junk mail and
myriad of catalogues, there’s your tax
refund. If your tax refund (or a job bonus or any financial windfall, for that matter) has arrived (or is on the way),
here are some thoughts offered by Den-nis
Filangeri, a Certified Financial Planner
based in San Diego, on how to make
that money “work” for you.

Reduce high-interest debt. The 15 percent
in the Cambridge Index survey who reduced credit card debt had the
right idea. Put that refund toward a
credit card balance carrying a 14-percent
interest rate, and you’ve guaranteed
yourself a 14-percent return on your
money. And keep it paid down once you
do. Lowering high-interest consumer
debt is one of the best financial moves
you can make.

Establish an emergency fund. Nearly
60 percent of the households in America
with children under age 18 live paycheck
to paycheck, according to a recent
survey by MetLife. A pool of “rainy day”
cash to meet emergencies would be welcome
news for them. Try to keep at least
three months’ living expenses in a short-term savings account, such as a money market or checking account.

Put it into a retirement plan. One in
four eligible workers doesn’t participate
in his or her employer’s 401 (k) plan,
according to several studies, and many
more workers don’t fund their plan sufficiently
to earn all of their employer’s match.

Say you receive an $800 tax refund. Put
the money into your 401 (k) and you
will immediately earn another $400 if
your employer matches 50 cents for
each dollar you contribute. You’ll double
your contribution if the employer
kicks in a $1 match. That’s a lot of bang
for your refund.

Other retirement accounts. No 401 (k)
plan or other employer-sponsored plan
at work? There are always individual
retirement accounts, and if you’ve
maxed out contributions to those
accounts for the year, consider tax-efficient
mutual funds or maybe annuities.

The self-employed have even more
options, including solo 401(k)s, simplified
employee pension plans and
Keogh plans.

Put it toward college. Invest it in a college account for your children. The younger they are, the more years the
refund will have to grow. Consider
investing in the tax-free growth of a 529
college savings plan, a Coverdell education savings account. or U.S. savings bonds.

A baby born this year can expect
to shell out $220,000 for a private col-lege
or $110,000 at a public school in 2022, according to a study by the College Board, a nonprofit education organization
that tracks the costs of higher education.

Set up a gift fund. Use the rebate as a Christmas gift fund. The fund allows you to spend the money and get your
holiday shopping out of the way at the same time.

Spruce up the homestead. Thinking of
a do-it-yourself landscaping or remodeling
job? Take the tax refund and get a professional to sketch out a plan for you to follow. For a few hundred dollars you
will know exactly what you’re getting
into and how much of it you want to do
yourself. Plus increasing the value of
your home can put extra equity in your

Make an extra house payment or save
for a down payment.
Knocking off a
chunk of your mortgage principal can
save you thousands in interest over the
long run. But accelerating mortgage
payments isn’t always the best move,
depending on your current mortgage
rate and investment alternatives. You
might want to consult a planner before
making this use of your refund.

Buy additional or new insurance. Do
you need additional disability coverage
or perhaps long-term care insurance!
While you’ll need to be able to keep the
premiums up in subsequent years, the
refund might at least get you started.

Take stock. Historically, stocks have
produced nice returns, and just investing
a few hundred dollars can get your
nest egg off to a nice start. The biggest
mistake people make is thinking [what
they have] is too small an amount to
invest,” Filangeri says. ‘Rich people start
off as poor people. The difference is they
take their nickels and dimes and invest
them—they didn’t spend it all at the

Have fun. OK, keep at least a little of it
to have fun with, or spend it on something
that you “want” instead of “need.”

About the Author

Milton Zall is president of Zall Enterprises,
an editorial consulting firm based
in Silver Spring, Md. He writes on taxes,
investments, technology, the Internet
and HR/business issues. He is a Certified
Internal Auditor and a Registered
Investment Advisor. He can be reached
via e-mail at [email protected].

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