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Tax Refund Realities

When it comes to a windfall -- even an expected one -- those with the best intentions can get thrown when the check actually arrives in the mail.

Last February, Cambridge Consumer Credit polled 1,000 randomly selected folks about what they'd do with tax refund checks resulting from President Bush's tax cut package. Then the company followed up in December to see what consumers actually did with the windfall.

In February, 34% of respondents said they would save or invest their refunds. By December, just 20% made good on that promise. Forty-two percent earmarked the money for bills in February, and even more (48%) decided to pay down some debt by December. And while 24% admitted that they would go shopping with the money in February, by December 32% found themselves at the mall.

Hey, we're not going to get preachy here. But with another potential windfall expected soon (for all you on-time taxpayers, at least), here's your chance to blow the dough in the right way.

  • Tackle your credit card tab: Pick the card with the highest interest rate and pay that monster down. As long as you're attacking your debts, go ahead and negotiate for a lower interest rate so future payments will make a bigger impact. Use our free Get Out of Debt Guide to plan your offensive.

  • Shop smart: Why not stretch those refund dollars as far as they can go? The folks on the Living Below Your Means discussion board have packed an FAQ with dollar-stretching ideas.

  • Supersize your savings: Granted, interest rates aren't what they used to be. But you can get some payoff for socking your money away. Here's a hand to help you figure out what kind of short-term savings account is best for this windfall.

  • Invest it: For the handful of you who are going to invest, $2,136 (last year's average tax refund) can grow into $25,754! No, the lottery won't get you there. But 10% average annual returns over 25 years will. It's as easy as 1-2-IRA.

It might take a little bit of willpower, but consider these suggestions. Go ahead and spend that tax refund -- Foolishly.


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