Generally, when you hear experts talk about what to do with your refund, the advice boils down to two salient bits: Pay down your credit card debt or deposit it in an IRA. But this year, thanks to the 2003 tax law changes, tax refunds are substantially higher than last year. They're averaging $2,256 according to the IRS, and putting smiles on the faces of the understandably happy recipients. That calls for some additional thought. You may eventually decide that the IRA deposit or debt reduction strategy is the right move for you… but you may also want to consider the following:
Join a gym
Exercising regularly knocks hundreds of dollars off the cost of your healthcare each year (it also adds years to your life). And it may not cost as much as you think it will. A recent study by Blue Cross Blue Shield Foundation on Healthcare found that more than 50 percent of health insurance plans offer discounts or reimbursements for gym memberships. Even more provided discounts on at-home equipment.
Get a financial plan
Studies have shown that people with an annual income of between $20,000 and $100,000 who have a financial plan have double the savings of people in their income bracket who do not. People who make more than $100,000 who have a plan have 60 percent more than those who do not. The point -- a financial plan may not be free -- but clearly it's worth paying for. That doesn't mean you have to put a financial advisor on your payroll for life. I'm a big believer in using financial planners as short-term therapists to get you on the right track… then seeing them when you feel you need additional help. In many cases you end up doing much of the administrative work yourself anyway. Where do you go for help: fpanet.org is the Web site of the financial planning association, napfa.org is the Web site of the national association of personal financial advisors. Both have search engines that can help you locate planners in your area.
Have your car tuned
Gas prices have been hitting record levels. You may not be in a position right now where trading in your car makes a lot of sense (though buying the most fuel efficient vehicle in a particular class can save you $300 to $500 a year), but fixing a car that's out of tune can improve gas mileage by about 4 percent. Replacing a clogged air filter can improve gas mileage by as much as 10 percent (and protect your engine at the same time). And repairing a faulty oxygen sensor can improve fuel economy by as much as 40 percent. All cars should have a thorough tune-up, experts say, every 15,000 miles.
Make an extra mortgage payment
If you have a 30-year fixed rate mortgage and you make an extra payment each and every year, you will reduce the term of that loan to 23-years. That's right, you'll wipe out 7 years of interest payments. Note: If you're going to do this, make sure your loan doesn't have prepayment penalties. Then, send a second, separate check to your lender with a notation that this is an extra "principal payment." You want to be sure the money is going to build additional equity in your home. (Note: If the cost of refinancing your mortgage has stopped you from undertaking that transaction, using your refund to refinance can save you additional money in the long run.)
Protect your family
If you're one of those people -- particularly parents -- walking around without a will, consider using your tax refund to get yourself to a lawyer and get yourself a basic estate plan. The price for a will from an attorney including a healthcare proxy and living will (two must-have medical directives) starts at about $500 depending upon the experience of the attorney you select and where you live. You may also want to consider protecting your family by filling gaps in your insurance coverage: Have you been doing without life insurance (despite the fact that you have dependents), disability insurance, health insurance? There are few better uses for your money.
Open an account for 'periodic expenses'
When you think about what drags people into credit card debt, it's often not the month-by-month expenses (those you have a pretty good ability to account for mentally), it's the quarterly and half-yearly ones. It's the insurance premiums, the cost for birthdays and holidays, the 15,000 mile check-up on the car, and the payment for summer camp. If you have an account in which you stash some money for precisely these uses, you'll be able to drain that (rather than charge up the Visa) when expenses like these roll around. Note: Put the money in a money market or savings account that pays a better than average rate of interest. For a list of the best rates go to bankrate.com.
Make a donation
If you wanted to give to your favorite charity at holiday time but were tapped out, consider giving part of your refund away. This will qualify as a deduction on your 2004 return.
Start a home repair fund
According to the Harvard Joint Center for Housing Studies you can count on home maintenance running you about 1 percent of the value of your home a year. The tricky thing about this is that the expenses tend not to be consistent. You may pay nothing for a few years, then end up with a $10,000 bill to repair or put on a new roof. The key to being able to handle these expenses is setting some money aside with the full expectation that they can -- and eventually will -- catch up with you.
Is getting a tax refund a good thing or a bad thing?
When you get a tax refund, you're getting money back in taxes that you should never have paid in taxes - in other words, you've been giving the government an interest-free loan on your money. You're better off, from a financial perspective, having use of your own money. That way you can invest it and earn the return yourself. In order to minimize the size of the refund you'll get next year, you need to decrease the amount you have withheld from your paycheck by filling out a new w-4 form. Contact your benefits department for one or pull one off the web at irs.gov. Likewise, if you found you owed taxes this year, you may want to increase your withholding to cover the gap.
Should I get a 'refund anticipation loan?'
Avoid the allure of "refund anticipation loans" that send you home from the tax preparer with a check in your pocket. The cost of getting that loan, according to the National Consumer Law Center, can be 10 percent of your refund -- in other words $200 or more on a $2000 tax rebate. That's too much to pay to have your money just a few days earlier. Instead, file electronically and elect to have your refund direct deposited into your bank account. That will get your money to you in about 10 days.Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Copyright © 2004. For more information, go to her Web site, .