It’s Your Money Column – What to Do with that Tax-Return Windfall?

Maybe you’re thinking about the tax refund you’ll be getting soon and wondering whether you should buy new furniture or take a cruise. Instead, how about thinking of your future financial security?

One of the ways to achieve financial security is to use windfalls such as tax refunds, gifts and garage-sale earnings to either increase your savings or pay down your debt. Here are some tips on using a windfall to make financial progress.

• If your employer offers a tax-sheltered savings plan and will match your contributions, invest your windfall.
• Invest in your own individual retirement account. You can set one up with a local financial services firm or use the Internet to find a mutual fund service that can send you the paperwork to set up an IRA.
• If you keep getting tax refunds, change your withholding exemptions so less tax is withheld from each paycheck – but do this only if you’ll put the extra money into an automatic savings plan.
• Invest in yourself. Upgrade your work skills by taking classes or sign up for a class to learn about smart ways to manage money.
• Pay off your credit cards or car loan. Put what you were paying each month into a savings plan or mutual fund instead.
• If you need better transportation, use a windfall to make the largest possible down payment on a vehicle.
• Consolidate all your loans into a single home-equity loan. Apply your windfall to the amount financed. Use only one credit card and pay off the balance each month. When you’ve paid off the home-equity loan, keep saving.
• Review your home mortgage. There are three ways you can save over the life of your mortgage. You can apply the windfall to your principal, which could save months of mortgage payments in the future. You can refinance the loan at a lower interest rate and contribute the difference to the equity, which can lower your payments and save thousands of dollars. Or, you can refinance as a 15-year mortgage. On a $100,000 fixed-rate loan at 8 percent interest, you will pay $90,000 less over the life of the loan than you would with a 30-year mortgage.
• Establish an emergency fund by putting your windfall in a certificate of deposit or money-market fund. See Money Magazine for the top current yields and toll-free numbers throughout the country.
• Take your windfall to a consumer credit counseling office and work out a total budgeting/debt reduction plan.