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Five Smart Ways to Spend Your Tax Refund

Published October 20, 2011

The Internal Revenue Service (IRS) estimates that the average refund for this year will be close to $2,000. This has many Americans across the country struggling with the decision of whether to buy a vacation package to the Caribbean or to utilize the extra income towards something more useful. If you are one of the millions of people caught in the middle of such a debate, CreditGUARD of America has five smart ways on how to put that income tax return to good use.

Pay Off High Interest Credit Card Debt

In 2004, an average household owed close to $10,000 in credit card debt, yielding interest charges of more than $1,000 per year. For instance, if you decided to pay $400 a month on such a balance with an interest rate of 16.5 percent, it would take you more than two and a half years to pay off the debt completely. This also means that you will have to pay more than $2,100 in interest charges alone. When paying off your credit cards, keep in mind to pay off those cards with the highest interest rates first. This will help you keep your interest charges to a minimum.

Invest in Your House

Before spending your tax return impulsively, consider spending a portion of that money towards the largest investment that you probably own, your house. A complete termite inspection, a new coat of paint, new carpeting or remodeling your old kitchen can not only improve the quality of your life, it can also increase the overall value of your home.

Create an Emergency Account

According to credit experts, consumers should initiate an emergency fund and put away 3 to 6 months worth of living expenses. This type of fund can relieve a great amount of stress and anguish if you suddenly lose your income. You can easily create an emergency account by utilizing your upcoming income tax return. When selecting an investment, make sure you select an investment that is fairly liquid, such as Certificate of Deposits (CD) or a money market account where your savings are easily accessible.

Save for Retirement

According to the 2004 Retirement Confidence Survey conducted by the American Savings Education Council (ASEC), only 6 out 10 workers are currently saving for retirement. If you have not started saving for your future yet, CreditGUARD of America recommends that you initiate a savings plan with your income tax return. Contributing a percentage of your monthly salary to a 401(k) plan or initiating an Individual Retirement Account (IRA) can provide the much needed monthly income when you retire.

Open a College Savings Plan

College Education is getting more expensive by the year. Nowadays, a typical four-year college education can cost upwards of $100,000. According to savings experts, the average cost of tuition and fees rose to 9.6 percent at four-year public schools and 5.8 percent at private schools in the previous academic year. State governed 529 college savings plans are the most effective tools when saving for college. Under 529 rules and guidelines, parents can contribute up to $250,000 per beneficiary. The 529 college savings plan works much like a Roth IRA, where withdrawals are completely tax-free when used for higher education purposes.

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