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8 Ways to Spend Income Tax Refund

by Jamie Gold

Itís that time of the year again! Income tax refund time! The IRS estimates that the average income tax refund this year will be close to $2000. Wondering how to spend your income tax refund? You might already have ďfunĒ plans for your income tax refund such as a plasma TV, a razor cell-phone, a computer, or a Bermuda vacation, which are advertised and advised all over the net by the people who want to sell those things to you and make a profit off your income tax refund, but you can opt for a wiser option.

Studies suggest people will be more responsible with the spending of their income tax refunds this year. With rising interest rates, inflation, increasing gasoline prices, increasing health costs, war in Iraq, and diminishing Social Security fund due to Baby Boomers, there are plenty of reasons to exercise caution when spending your income tax refund in this time of uncertainty. If you are also looking for wiser options for your income tax refund, we have a couple of ideas for you:


Option #1 on how to spend your Income Tax Refund:

In 2005, the average U.S. credit card debt per household increased to $8,000 from $2,985 in 1990 and carried an average interest rate of 14.71%. Paying down high interest credit cards should be your number one priority when it comes to how to spend your income tax refund. Making minimal payments on your cards will not get you far since it makes you accumulate principal, on which you will be paying interest again! Itís a never-ending story, in which the creditors are the only winners. The only way to get out is to pay more than the minimal amount and, even better, pay off the whole thing. That way, you are not only paying off your principal, but you will not have to pay monthly interest on it.


Option #2 on how to spend your Income Tax Refund:

It is advised that you have a three to six monthís salaries saved up in the emergency account. Just in case you come upon hard times and/or loose a job in todayís volatile job market. With the outsourcing to India, Philippines, Russia, China, Mexico, and other countries, white-collar professionals are at higher risk then before. You have a couple of options on how to spend an income tax refund here: Savings account is the most popular one, but it produces low interest. You might want to consider a Certificate of deposit (or commonly called CD), especially with rising rates, which are the highest in 4 years. 1 year CD rate is around 5% nowadays. You might want to consider a CD with a short maturity, since the rates are expected to rise further.


Option #3 on how to spend your Income Tax Refund:

About 30% of Americans do not invest in their retirement. With baby boomers getting older and the Social Security Fund diminishing, there might be no money available at all by the time you retire (and there will probably be no income tax refunds for you either). Not to count the fact that it would be pretty hard to live only on Social Security, not supplemented by other savings. To keep up your current living standards at the time of retirement, most Americans need to save. You might want to contribute your income tax refund to an IRA. There are several options you should consider, depending on your situation. For example, you might consider Traditional IRA and Roth IRA.


Option #4 on how to spend your Income Tax Refund:

If you own a home and still have high rates, this might still be a good time to Refinance further since interest rates are rising as you read this and are expected to rise further. Also, if you have a Variable interest rate, you might want to refinance to a Fixed interest rate at this time.


Option #5 on how to spend your Income Tax Refund:

Making two extra payments a year on your home mortgage decreases the years of your loan in half. Thus, if you have a 30 yr mortgage, but are making two extra payments a year, you might be able to pay off your loan in 15 years. What a great way to spend money!


Option #6 on how to spend your Income Tax Refund:

Invest. This is a tricky one since you must be willing to take risk. Generally, bonds are less risky than stocks, and money market instruments are less risky than bonds. The key here is to diversify. You might also consider Mutual Funds run by professionals who made decisions for you.


Option #7 on how to spend your Income Tax Refund:

Does your job not bring enough financial rewards? Are your skills out of date? Did you always want to ďdo something about itĒ? Getting education to going back to school, or just taking a class of your interest, might be a great way to spend your income tax refund money. This is an investment in itself and your future. There are also Continuing Education tax write offs that you might be eligible for at the end of the year (ask your tax accountant), so you will be returning a portion of the money you spend this year on education, next year.


Option #8 on how to spend your Income Tax Refund:

Open a 529 College Savings Plan. With college education cost rising rapidly, four-year college costs $100,000 and counting. 529 Savings Plan works just like a Roth IRA, where withdrawals are tax-free when used for higher education, and you can contribute up to $250,000 per child.

Before you run to achieve your plans, you should wait for the actual Income Tax Refund. Itís important to spend the money you have rather than the money you only anticipating to receive from an income tax refund. Only a little over 70% of Americans get income tax refunds at the end of the year. According to one poll, 84% of people are expecting to get an Income Tax Refund this year. It would be a double disappointment and a bigger financial hole to spend the money you will not receive.

If you donít get an Income Tax Refund this year, you might want to change your withholding exemptions to be eligible for a tax refund next year. Letís face it. Those monthly savings will not be visible and you will probably not even notice how and when you spend it. But a lump-sum tax refund amount has a better psychological chance to be used wisely.

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