MARQUETTE - If you're like most people who are anticipating a tax refund, you've probably already filed your income tax return and may even already have the refund.
Local debt counseling experts say that before you spend it, a good rule of thumb is to slow down and give some deep thought to the best thing to do with the money. Getting a big refund can also be an indication that you may need to change your exemptions.
"One of the things I like to do with my clients is calculate how much their refund is per pay period," said Stuart Baker, a credit counselor at GreenPath Debt Solutions in Marquette. "If you get paid every two weeks, a $3,000 refund calculates to $115 per pay period. When it's broken down like that, and compared to how much is deducted for federal tax, people really start to think about making changes."
Experts also advise setting aside some of the money for "just in case" situations.
"Here at GreenPath, we advise everyone to start an emergency fund. You'd be surprised how much peace of mind you can get by having $500-$1000 in savings for emergencies" Baker said.
To be in the best possible position, having the equivalent of three to six months of your basic expenses in savings is the benchmark industry experts say you should aim for.
The Federal Reserve has announced that outstanding credit card debt recently rose for the first time in two years.
"Consumers increased their borrowing by approximately $6 billion in December," Baker said. "If that sounds familiar, instead of spending all your tax refund on a vacation, consider using it to pay down your debt."
There are several ways this can be done. If you want to have the biggest impact on your outgoing monthly bills, GreenPath advises to concentrate on the bills with the highest payment as a percentage of the debt.
For example, if you have two credit cards, each with a $1,000 balance and one has a minimum payment of $30 and the other has a minimum of $20, pay off the $30 per month account, Baker said.
"This can lead to paying more in interest fees per month if the card you pay off has a lower interest rate than the one you keep," Baker said. "However, it is very rarely a bad thing to pay off debt."
Another plan is to pay the funds to the smallest balanced cards first, to try to get rid of as many of them as you can. If you have seven store credit cards with balances of $300 and a bank card with a $3000 balance, you could pay off the seven smaller accounts and only be left with one credit card payment each month.
"That takes a lot less organization, a lot less planning, less postage and a much smaller headache each month," Baker said.
If you're saddled with high interest rate cards, GreenPath suggests focusing on the higher interest rate accounts first. That way you'll pay less interest over time.
If you have two cards with $1,000 balances, one with a 24 percent interest rate and one with a 13 percent interest rate, you'd save over $900 in interest by paying the higher rate card off and paying the minimum on the smaller account, rather than vice-versa.
If you're not sure which of these options is the best for your situation, consider contacting a non-profit credit counseling agency. Agencies can be located via the National Foundation for Credit Counseling website at www.NFCC.org. GreenPath can be contacted at www.greenpath.com
John Pepin can be reached at 906-228-2500, ext. 206. His e-mail address is email@example.com.