Maximizing Your Tax Refund

April 17th is the last day to file your 2011 personal income tax returns

. Once you file, the only thing left to do is decide how you want to use your refund check. While you could use the money to take an extra vacation or splurge on something youve wanted to buy thats outside of your budget, why not use the money in a more strategic way to improve your finances?

According to statistics, almost 1 in 4 Americans spent their tax refunds either on vacations or big-ticket purchases like a new TV or furniture set. Another 1 in 4 used their refunds to pay everyday expenses they couldnt cover in their monthly budget. While the latter may sound like a better use of the money, in truth its still not actually helping improve your financial situation.

A more strategic use of your tax refund is to use it to pay off debt. The IRS estimates the average tax refund this year will be $3,070. With average consumer credit card debt now at about $4,300, its easy to see how your tax refund could go a long way towards drastically improving your financial situation. As unsecured revolving debts, the bills due on your credit cards go down the more of the debt you pay off. If you pay off a large amount of your unsecured debt, you can free up hundreds of dollars in your budget.

In this light by using your tax refund to pay off debt, you can improve your budget to incorporate the everyday expenses you wouldve covered using your refund. Even better, unlike using your refund on incidental expenses, using it to pay off debt will have a lasting impact on your financial outlook long after the money is gone. By contrast, simply paying everyday expenses may help your budget in the short-term, but when the money runs out youll still be facing financial hardship.

In addition, if youve gotten in the habit of spending your refund on bigger purchases or vacation expenses, spending your tax refund on debt instead wont prevent you from getting those nice bonuses this year. Simply use your tax refund to pay down your credit card debts and then create a budget that allows you to save money for splurging. With the right budget strategy in place, you can make your big-ticket purchase later in the year and still get to treat yourself with your refund.

If you dont have debt to pay off, you can also use your tax refund to improve your financial outlook by contributing to savings or retirement. Financial experts recommend you should have 2-3 months of expenses covered in savings in case you have an emergency and cant work. If you have this financial safety net in place, youll be better prepared to weather any financial storm that may come. Contributing to retirement will help get you prepared for your financial future, and at a time when 3 out of 4 Americans have less than 1 year of retirement savings built up, contributing to retirement is critical.

If youre in a situation where youre struggling with too much debt and you dont think your refund will make enough of an impact on your credit card bills, consider this as the perfect time of year to seek help to get your finances in order. A credit counseling service can help you consolidate your debts and make a plan to get your finances back on track. With the right debt management plan in place, you can get out from under your debt burden and start looking forward to a better tax refund season as soon as next year.

by: Claudia Humphrey

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