What should YOU do with your tax return?

1. Start that emergency fund, pronto. OK, at first blush this may not sound like as much fun as buying some new pairs of shoes, but this step will be far more therapeutic in the long run. Most of us know that we should have an emergency fund stashed away that could cover six months of living expenses — and most of us haven’t gotten around to doing that. The psychological benefits of having this cushion cannot be overstated, though. This way, if anything goes wrong in your life — a job loss, divorce or illness, for example – you can breathe easy knowing that your bills can be covered. You could use your tax-rebate check to jumpstart your emergency fund and then begin squirreling away a regular amount of money toward it each month. Just pretend that you have a new monthly bill in the amount of, say, $50 or $150 — whatever you can realistically handle — and sock it away consistently until your emergency fund reaches the level where it should be. For suggestions on where to save this money, read this past “10 Tips” column about online savings and money-market accounts that offer decent yields.

2. Wrestle your bills to the ground. For many Canadians out there, the answer to what they would do with the extra money is simple: Tackle their bills. If you’re struggling under the weight of out-of-control bills, this is a fabulous idea — and one that ultimately would be far more beneficial to you than buying up consumer goods. Here’s another idea to consider in this same vein: You could simplify your bill-paying throughout the year. Msnbc.com reader Bonnee Brown of Parachute, Colo., wrote in recently to share this tip: “I spend my tax return on things that make my daily life easier. Last year I called the utility company and went on a budget billing plan. When I received my tax return I prepaid it for a year. … Now I have $150 a month that I can spend on other things or bills. I did the same thing with my cell phone bill, home phone/satellite and Internet bills. It has made the monthly balancing of the checkbook just a little easier. It is also nice to know that if by chance I lose my job … my kids will have heat, electricity and something to watch on TV while I use the Internet and phone to find another job!”

3. Pay down credit-card debt. Credit cards can be your friends — but only if you pay your balances off in full and on time each month. If you’re walking around with balances on any credit cards — particularly cards with high interest rates in the range of 18 percent or more — then the answer to what you should do with any future tax-rebate check is simple: Pay down that debt. Even now, you can start the process of getting this monkey off your back by transferring your credit-card balances to a card with a lower interest rate right away. You’ll save $730 if you transfer a $2,000 balance from an 18-percent card to an 8.25-percent card and then pay off your balance at a rate of $50 a month. Even better, transfer balances to cards with rates of 0, 1 or 2 percent if you can and concentrate on paying them off entirely while those low rates last.

4. Invest in the future. How have you been doing lately when it comes to saving for your retirement? If you’ve been neglecting this important area for whatever reason, you could use your rebate check to get back on track. In many cases, you can view your contributions to a tax-deferred retirement plan as an instant raise. That’s because you’ll enjoy an automatic tax break, plus many employers will match your contributions up to a certain point — often 50 cents for each dollar you contribute for up to 6 percent of your pay. Even if your employer doesn’t offer this benefit, open a traditional individual retirement and start saving anyway. Yet another idea: If your retirement savings is on track, you could use your rebate check to invest in the future of your child or another child you love. How so? By starting a RESP college savings plan to help cover his or her future college costs.

5. Invest in your potential. Could you benefit from a job-skills upgrade? If so, why not take a class or two or three that could give you a boost? Many universities across the country offer extension programs with courses for professional development in the evenings and at other convenient times. You also could look into classes offered through community colleges and accredited online degree programs. Another possibility: The computer school New Horizons has dozens of locations, and you could beef up your technical and software skills there. After investigating your options, you’ll find that you can do your resume quite a bit of good for under $1,000.

6. Don’t let your house sink you. Are you among the millions of Americans who have borrowed against their homes for various reasons? If so, you could use that $300 to $1,200 to pay down your home equity line of credit and help put this extra debt behind you while interest rates are low. You also could consider making some extra payments toward your primary mortgage as well. By paying an additional $100 a month toward the principal on a $150,000, 30-year mortgage with a fixed interest rate of 6.5 percent, you’ll save more than $51,000 in interest and be able to retire your mortgage nearly seven years early. An extra monthly payment of even $20 or $25 can make a surprising difference. Granted, you’d stand to benefit more if you could invest that extra payment in an interest-bearing account offering a guaranteed higher rate of return than your mortgage rate – say, 7 percent to 8 percent. And paying off your mortgage early means you won’t have the tax benefits of home ownership for the same number of years. But if you’re after the psychological benefit of owning your home outright and spending far less on interest over time, then the extra-payment approach is something to consider.

7. Give your ride a little TLC. Youalso could use your tax-rebate check to take care of some important car maintenance. Are you approaching the time for a 30,000-mile full service for your vehicle? If so, why not get that behind you? Here are some additional maintenance measures to consider:

8. If you’re going to buy something, make it worthwhile. Want to use your newfound cash to save yourself money and help the environment at the same time? Then consider buying an energy-efficient appliance, especially if you’re now relying on older, less-efficient appliances. To highlight just one example: Horizontal-axis (front-loader) washing machines use far less water and 60 percent less energy than top-loaders. If you invest in a high-efficiency washing machine, you’ll be pleasantly surprised by the reduction in your utility bills and the discounts and rebates that likely will apply to your purchase.

9. Do your part to combat poverty. Have you heard of Kiva.org? Through this site, you can provide microloans in amounts as low as $25 to worthy entrepreneurs in poor countries. Before deciding where to send your loan or loans, you can read all about different entrepreneurs who live and work in the developing world. The microloans typically get repaid within six to 12 months. If you’re intrigued by the idea of devoting at least some of your tax-rebate money to a hard-working business owner who really could use the help, visit this site to learn more about how the microloan process works.


10. Recharge your batteries. OK, if tips 1 through 9 are striking you as just a little bit too responsible, here’s a final tip for you that encourages some indulgence: How about taking a not-too-expensive, not-too-stressful trip with someone you care about? Short jaunts involving two- or three-night stays in beautiful spots can help you save your sanity and regain perspective, especially if you haven’t had the time or money to take a break for a while. Of course, you also could use that stimulus check toward a more elaborate, horizon-broadening trip — but if you know that route is likely to leave you feeling more exhausted and stressed out about money than you feel right now, then it might not be a bad idea to reconsider some of the suggestions in tips 1 through 9.

Sources and resources:

•“The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke”
•Kiplinger’s Personal Finance magazine•Bankrate.com
•Edmunds.com