TODAY

TODAY   |  April 15, 2014

Should you spend or save your tax refund?

TODAY financial editor Jean Chatzky advises TODAY viewers that handling a tax refund wisely can make a big difference in your financial life.

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This content comes from Closed Captioning that was broadcast along with this program.

>>> the dead loin is midnight tonight to get the tax return in.

>> according to the irs, the average refund is about $2,800, and if you spend it wisely, it can pay off big later. here with some smart advice is "today" financial editor jeanne chatski. you get that big fat check.

>> it's a lot of money.

>> but you have to use it wisely. i didn't. i'm going to be honest.

>> you can make good decisions that will pay off really big down the road. because this is a significant chunk of change.

>> you start with make an extra mortgage payment.

>> so the average mortgage is $290,000. over the life of that loan, you're paying $230,000 just in interest at 4.5%. so if you take that $2800 refund and you make one extra mortgage payment one time, you're going to save seven months off the end of your morning and about $7,000 in total interest. but if you do it every year, you save $64,000 in interest and get out of that mortgage seven years early.

>> you've sold me on that. it's so smart.

>> when do you make that payment then? when do you make the extra payment?

>> i would make it as soon as i get the money so that you don't have the urge to do something else with the money. just make sure it goes to principal. if you're actually writing a check, write principal on your check. if you're doing it electronically, call your bank and say i want this to be a principal payment.

>> that's a very responsible way to spend your refund. that's very good.

>>> the next one, replace an old appliance like a fridge or air conditioner . why does this pay off?

>> because energy savings are significant. you replace a 15 or 20-year-old fridge, you could save $250 a year in just energy costs . so go to energystar.gov, there's a calculator there where you can type in the old appliance that you're thinking of replacing and it will tell you how much money you'll save every year just in energy savings.

>> again, a smart way to think about it. not looking at just the appliance. you look at the money you're getting back in energy savings there.

>> you want it to pay off.

>> put it in a 529 college savings account .

>> we hear from parents all the time, they know they have to save for their retirement, but they feel guilty about not saving for college. you put that $2,800 every year into a 529, earns 6% on that money, which is a pretty conservative return. 18 years down the road, you're going to have $91,000, and by the way, right now, that's enough to pay for four years at an instate moderately priced school. now, will it be down the road? probably not. but it will get you a large part of the road there. just one note. not all 529s are created equal . you want to make sure you're in a good one. maybe get a tax break from your state. go to savingforcollege.com and it will tell you where to go.

>> that's good advice. we do that for our kids. it's great.

>> i do it for mine as well.

>> another good one, emergency savings account . just put it away.

>> i know we urge people six to nine months emergency cushions, but we also know half of americans don't even have a couple thousand dollars put away. the average cost for a family of four to get through one month is about $5,200, so that $2,800 is a really, really good start on that money. and then if you can add $200 a month to it through the rest of the year, you'll have that solid one month emergency cushion by this time next year.

>> and honestly, there's a sense of satisfaction, and you feel good when you're able to have that little bit of emergency money if you're able to. it makes a big difference.

>> absolutely. and look at the money as it's adding up. go visit those accounts and see yourself making progress.

>> you say pay off some debt, but you point out pay off the most expensive debt.

>> so here's a good way to think about that. the return on your money that you get when you pay off a debt is equal to the interest rate . so you pay off a credit card at 9%, you're getting a guaranteed 9% return on your money. or a 19% return. so if your most expensive debt is a car loan . if it's a credit card , pay off the credit card .

>> thank you, great advice. appreciate