How to spend your tax refund

tax-refund-editedThe majority of taxpayers, approximately 75 percent, will receive refunds this year, according to the Internal Revenue Service. The average refund is expected to be $3,000.

River North resident and building engineer John Stevens, 33, has already used his refund for a down payment on a vacation to Vail, Colorado.

“For the last five years, I have spent my tax refund on a vacation.  This year I am looking forward to doing some skiing,” Stevens said.

That’s a common temptation, but personal finance coaches advise more prudence.

“It is hard not to spend free money on something fun. So I advise my clients to deposit half their refund in their savings account and spend the other half on themselves,” said Kelley C. Long, a personal finance expert in Chicago.

Matt Kelly, a personal finance coach from Colorado, advocates a four-step process to spending your tax refund. It begins with setting up a $1,000.0 emergency fund.

“I always like to use the example of tires. People will eventually need new ones every 36 months, but never budget the cost for buying them. This is when the emergency fund comes in handy,” Kelly said.

For the one in four consumers who are behind on their debts, according to a new study by the Consolidated Credit Counseling Services Inc, a tax refund offers the opportunity to get caught up.

Michael Villano, 50, a hospitality professional from Prospect Heights plans on doing just this.

“With one of my girls in college and the other one soon to be going, finances are tight so the tax refund will definitely help with bills.  Unfortunately, I will not be able to take a golf vacation this year like I did when my girls were younger,” Villano said.

Long says that’s a good idea.

“I recommend that my clients with debt allocate 40 percent to paying bills, 30 percent to their savings and 30 percent to something fun,” Long said.

Kelly’s strategy is to pay off the smallest debt first with minimum payments and then apply those same payments to your larger debts.

Once you are debt-free, he warns, there is a temptation to return to your free-spending ways, but that would be a mistake. Instead, you should aim to grow your emergency fund to up to six months of living expenses.

“I don’t recommend the emergency fund because it is right thing to do, but rather it lets you live your life. Debt steals your dreams. It is a tragedy,” Kelly said.

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