Ask the expert: Best way to spend that tax return?

Ask the expert: Best way to spend that tax return?
A lot of people look forward to their refund, which can be sizable. The average federal tax refund will be almost $3,000 this year.

A recent survey by Capital One bank shows that about a third of those people getting a refund plan to spend all or part of it.

Recently, I sat down with Greg McBride, senior analyst with Bankrate.com, to talk about other ways to use this financial windfall.

"There are good uses for the tax refund. If you're using this to pay down high-cost debt like credit card debt, padding that emergency fund that we all so desperately need but so few people have, or boosting your retirement savings such as putting it directly into your IRA, those are all good uses," he said. "If you're using your tax refund for one mor more of those objectives, you're on the right track."

And we always suggest you use direct deposit because that's the quickest way to make this happen. Can you direct that to different funds -- a little bit to the IRA, a little bit to this and a little bit to that?

"You certainly can," McBride said. "You can actually split that up three different ways. So it's great for accomplishing multiple goals, like putting something into the emergency savings and also putting some into your IRA."

I know a lot of people like to get that windfall at the end of the year, but if you're letting Uncle Sam keep your money for the whole year and getting a big refund. That's really a problem, isn't it?

"That's what a tax refund amounts to -- you've given Uncle Sam an interest-free loan for the past 12 months. You're getting your money back. You could have had this money throughout the year. With interest rates so low, it's not like you're giving you a whole lot of interest over the course of the last year. But particularly if your budget is stretch, you could have this money throughout the year by adjusting your paycheck withholding, getting a little bit more with each paycheck.

"Or if you're afraid you're going to fritter the money away, adjust that paycheck withholding, but increase your 401(k) contribution by the amount of the additional money in the paycheck. That way it's going directly into your retirement savings."

Are there things we should not do with that money?

"Because it's the biggest windfall most people get all year long, there's the temptation to go out and spend it and spend it on something big. And there's nothing wrong with that if you have your financial bases covered.

"But again, if you're still carrying high-interest credit card debt, if your emergency savings is inadequate or you're behind on your retirement savings like so many people are, then you have bigger financial fish to fry," McBride said.

More Information:

Make Your tax Refund Count