Use Your Tax Refund to Pay Off Debt

Last Updated Apr 15, 2009 7:25 PM EDT

I just mailed in my tax return and I'm thrilled I'm getting a refund, something that hasn't happened in at least a decade. Turns out I'm not alone. The IRS expects to send out $330 billion in refunds this year with the average check totaling $2,700 versus $2,500 last year.

How will you spend your refund? The days of splurging on a new laptop or vacation are behind us. Thanks to the recession, most of us need to be a bit more fiscally responsible. I'm happy to see many consumers agree.

According to a poll from the Associated Press-GfK, 54 percent of tax payers plan to use their windfall to pay off bills. Last year the figure sat at 35 percent. And 37 percent intend to pay down debt. That's a nice bump from last year when just 24 percent put their checks toward credit cards, and student and personal loans.

I applaud the nearly 40 percent of consumers who are paying off debt. Although I wish the figure was much higher. Americans can no longer afford to waste billions of dollars on interest payments, especially at a time when banks are raising interest rates. And you certainly don't want to be saddled with debt should you suddenly lose your income. So I beg you to make paying off overdue bills and credit card obligations your first priority.

If you have any of your refund check left over after paying off your debt, consider beefing up your emergency savings fund. As a rule of thumb, it's a good idea to have at least six months of living expenses set aside in case you get laid off. I can tell you from personal experience that it was a huge relief when I lost my job to know that I had banked plenty of savings to get me through more than a year without a steady pay check.

While you've no doubt heard the advice about building up an emergency fund before, few people are actually doing it. I know this because only a third of Americans say they are saving any money each month while more than 45 percent say they are dipping into their current savings to cover current day-to-day expenses, according to a recent survey by Capital One Financial Corporation.

If you're one of the lucky few who still has money left over after contributing to your emergency fund, think about your future. I don't know anyone who isn't complaining that his or her 401(k) or IRA hasn't taken a big hit because of the bear market. Now's a great time to think about replenishing those accounts.

Do you have other plans for your refund check? Please share your spending strategy with me.

All That's Left image by adonis paul hunter/ahptical, CC 2.0