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College of Human Ecology

Use tax refund to boost financial health

Wednesday, March 2, 2005

MANHATTAN, Kan. - A tax refund can spark a spending spree, but refund dollars should not be considered free money or a gift, said Carol Young, Kansas State University Research and Extension family financial management specialist.

"Your refund dollars have been earned, taxed and provided by you to the government as a no-interest loan," said Young, who offered a four-step plan for using a tax refund to improve financial health:

1. Review what you owe. Check outstanding bills and prioritize payments. For example, pay past due rent or house payments, utility, medical bills, etc. If you can't pay them all, pay what you can and negotiate a payment plan.

If carrying a balance on credit cards, pay down the card with the highest interest first, remembering, though, to also meet minimum payments on other cards to avoid late or other fees.

"Paying down credit cards and reducing - or eliminating - interest charges frees money to meet other expenses," said Young, who advised keeping credit card bills to the minimum.

"Try not to charge more than you realistically pay in one month," she said.

2. Anticipate expenses. "Consider events coming up in your life that will stress your budget," Young said. "Are you expecting a baby? Do you have a child entering a new phase of his her life such as going to camp or heading off to college? Are you planning a vacation? Or would like to replace an aging vehicle?"

Anticipating expenses and building short-term savings can eliminate the need to borrow money or run up a credit card bill that will need to be paid with interest.

3. Set aside refund dollars for long-term savings and investments. "Use the refund dollars to jumpstart savings for a down payment on a house, build an emergency fund or boost retirement funds with an Individual Retirement Account (IRA)," she said.

4. Treat yourself, but do homework before spending. Spending part of a tax refund to make a dream - new furniture or electronics, for example - a reality is a possibility, but it's best to consider debts and needs before making discretionary purchases.

"If you received a substantial tax return - $500 to a $1,000 or more - you might consider meeting with your payroll department to adjust deductions," Young said. "Doing so can reduce a future refund, but increase your take-home pay that you can use throughout the year."

Filing taxes electronically will speed a refund. Filing early, before the April 15 rush, also is likely to shorten the waiting time for a refund.

Wait, rather than apply for a refund anticipation loan, which Young likened to "paying to borrow your own money."

For more information on managing personal finance, contact the local K-State Research and Extension office or check Extension's Web site: www.oznet.ksu.edu for basic budgeting and other financial tips.

This article was posted on Wednesday, March 2, 2005, and is filed under College News, Family Studies & Human Services.