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Make the best use of that tax refund

It's tax season and many of us will soon learn that we have a little money coming back to us.

Already the TV commercials have begun urging us to spend our tax refunds on cars and other items. But as a banker, I have some other ideas for how a refund might best benefit you in the long run.

First, think of what a tax refund actually represents. It's money you've paid to the government over the past year to cover your tax obligation. But if you're getting a refund, that means the government has collected too much and is returning the amount that they, in essence, have been "saving" for you.

Yes, saving. That's exactly what a refund represents: saved money that is now coming back fully into your control. Many of us don't really miss those extra tax-payment dollars during the year. So paying a little more to the government to make sure we cover our tax bill isn't a bad way to force yourself to save, especially with interest rates so low.

But when that money comes back in a refund check, we often think about how to spend it, not how to put it to use to improve our overall financial health. That, I suggest, is a far better option for refund recipients if they don't have important, immediate expenses, and I'm not talking about booking a vacation here.

One way to smartly spend a tax refund is to pay down high-interest credit card debt. If you are running a credit card balance, you're paying a high rate for that loan ... and it is a loan. Rather than continuing to pay, or continuing to pay as much, use a refund to reduce or eliminate your credit card balance so you don't keep paying rates that sometimes approach 20 percent.

My advice always is to pay off the smaller credit-card balances first so you can at least clear the decks on those and make progress before you tackle bigger debt balances that may take more time.

If you don't have a credit card balance that needs reducing, I strongly suggest that you continue to save your tax refund, the money the government have been "saving" for you.

First, you never really need an excuse to start or add to a savings account. As little as $50 a month, over time can make a big difference, even in a period of historically low interest rates. But many of us do feel that we need a nest egg of some size to get started with a savings program. If that sounds like you, then use your refund as the starting point, and also commit to a weekly or monthly withdrawal from your paycheck or checking account into your savings account to keep your savings growing.

As with those extra tax payments that now have resulted in a refund, regular savings withdrawals from every paycheck can be relatively small. We don't tend to miss money when it's not there. But over time, we do benefit greatly from those extra amounts saved instead of watching them go to satisfying immediate spending desires, such as an extra meal out or a few more fancy coffee drinks.

You also might consider using your tax refund to start or add to a Health Savings Account if you qualify. HSAs are accounts that help us save in tax-advantaged ways to cover future health expenses, such as co-payments for doctor visits or prescription drugs. Your banker can tell you if you meet the HSA requirements.

Similarly, you might want to consider using your refund to save for retirement in an Individual Retirement Account, another form of tax-advantaged savings. Your banker also can tell you what your options are for an IRA based on retirement benefits that your employer may provide.

As the April tax-filing deadline approaches, we'll hear plenty more advertisements and promotions urging us to spend our tax refunds. But if you are in line for a refund, think about using that windfall money in the smartest ways possible, either by paying down high-interest debt or continuing to keep those funds that the government has "saved" for you in a savings account fully controlled by you.

Dale Lewis is president of Park State Bank in Duluth. You can reach her at president@parkstatebank.com or (218) 722-3500.

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