Plan before spending tax refunds

Jana McKinney McPherson County Extension Agent, Family and Consumer Science

It’s tempting to think about buying that big screen TV, but a rush to spend your income tax refund can erode the value of the refund.

If you need quick cash, arranging a short-term loan with a financial service provider usually is less costly than a refund anticipation loan, which typically has a higher interest rate and loan processing fee or fees.

Simply put, a refund anticipation loan requires a taxpayer to pay a hefty interest rate to borrow his or her own money for a relatively short time, sometimes two weeks or less.

Filing early, rather than waiting until a day or two before the annual April 15 deadline, filing electronically and/or opting for direct deposit can minimize the waiting time for a refund.

Use the waiting time to plan how you can use your tax refund to improve your financial situation. It is advisable to pay down debts with the higher interest rates first. If you owe $2,000 on a credit card charging 18 percent interest and pay $50 a month, it will take five years to eliminate the debt. The interest due - $1,077 - adds up to more than 50 percent of the original debt.

If, however, you use a $1,000 tax refund to pay down the debt and continue to pay $50 a month to clear the remaining $1,000 balance in two years, you’ll save $879 in interest.

Weighing needs versus wants can put the brakes on spending. The family may want a big screen TV, but may need more dependable transportation. If you are anticipating a refund to ask yourself:

— Do I have outstanding - or past due - bills?

— Am I carrying a balance on my credit card?

— Can I use the refund to clean up holiday bills? Should I set aside part of it to eliminate holiday bills this year?

— Do I have a big expense - such as property taxes, an insurance premium, loan payment or major car repair - coming up?

— Do I have adequate emergency funds set aside?

— Have I contributed to my retirement account or IRA (Individual Retirement Account)?

Adding $500 a year to an Individual Retirement Account can yield $68,100 in 30 years.

Increasing your contribution by $25 each year could yield up to $113,800.

People sometimes think of a tax refund as forced savings, yet, in reality, the taxpayer has provided a loan to the government without earning any interest. If a refund is substantial, check with the human resources department at work to adjust withholding to better match your tax liability.

Don’t have an emergency fund? Three- to six-months savings is a goal recommended for an emergency fund, but one that may not seem easily attainable. To begin, try to put away $5 or $10 a week to build emergency savings. Still feel the urge to splurge? After paying down debt and adding to savings for short- and long-term goals, set aside a small amount as a reward - something you or your family will enjoy.

More information on managing money is available at the McPherson County office of K-State Research and Extension at 600 W Woodside in McPherson and on Extension’s financial management Web site: