Treating yourself is fun, but paying off debt, boosting savings with refund check is better

Raleigh, NC – March, 2011 – There’s no shame in admitting getting a check in the mail is fun. And this year, about 75 percent of Americans will find a refund check from the IRS in the mail. Even better, the average refund will be about $3000 – a slight increase from 2009. But before dreaming of all the fun things that newfound wealth can buy, such as a new TV, vacation or furniture, there’s a word of caution. Paying off debt or building up savings can save a whole lot of trouble in the future.

“Folks need to remember their tax refund isn’t a gift or a prize; it’s their money. They worked hard for it and it’s important to be smart with it,” says Neil Ellington, executive vice president of CESI Solutions, a North Carolina nonprofit agency committed to debt-free living. “While we all need some fun in our lives and so a small treat may be fine, it’s better in the long run to pay off debt and build up savings.”

Consider:

• Paying off a credit card with a 21% interest rate means you are earning a risk-free 21% return on that money. That’s an interest rate you wouldn’t earn anywhere.
• Let’s say you owe $3000 on a credit card with a 21% interest rate. It would take 228 months to pay off the debt and you would pay $4624.68 in interest if you make just the minimum payment of $82.50 per month. Check out all of our financial calculators, including a calculator to check your debt payments.

Besides paying off debt, it’s also important to build up an emergency fund. While savings accounts are paying a miserable 0.1 percent interest rate, a good rule of thumb is to have several months of income set aside.

“I advise clients to follow the rule of thirds with a cash windfall such as a tax refund,” adds Ellington. “One third to debt payment, one third to savings, and one third towards a splurge or something you have been saving for.”