Apply the "Rule of Thirds" to Your Tax Refund

When it comes to tax time, people may procrastinate about doing their taxes, but few procrastinate when it comes to spending their tax refund, especially this year when many families are expecting to receive some extra money. Beginning on May 3, the IRS will mail out checks to more than 130 million tax-payers who qualify for the Economic Stimulus payments recently announced by the federal government.

But, before you go out on a shopping spree to help stimulate the economy, Loretta Abrams, senior vice president of Consumer Affairs, HSBC – North America, says you should take time to review your individual financial circumstances and create a plan which will help support the overall economy while improving your own financial situation.

Abrams recommends the "Rule of Thirds" when allocating a refund check.

1/3 to savings, be it for college, a home or retirement

1/3 to pay down debt, such as credit cards or car loans

1/3 to spend on you and your family. By treating yourself to a nice gift or needed item you'll also be helping stimulate the economy!

Savings

Add money to your emergency fund. Many financial experts recommend that we have at least three to six months' worth of household expenses set aside for emergencies, but really any amount is better than none. There has never been a more important time than now to ensure that you have funds on hand to cover unexpected expenses (e.g., household appliance or automobile repairs, minor medical expenses, school application or test fees, etc.). With a handy "rainy day fund", you can avoid relying on more costly short-term options.

Open a 529 College Savings Plan. With college education cost rising rapidly, four-year college costs could be $100,000 or more, and still rising! A 529 Savings Plan works just like a Roth IRA, where withdrawals are tax-free when used for higher education. You can contribute up to $250,000 per child.

Consider increasing your investments (IRAs, money-market accounts, 401ks – especially if they're matched by your employer). Do some research to find out what your options are!

Paying down your debt

Credit Cards: About 43 percent of American families spend more than they earn each year. As a result, average households carry some $8,000 in credit card debt. If paying down high interest credit cards is your number one priority, consider applying 1/3 or more of your refund to reduce or eliminate your outstanding balance. It's always advisable to pay more than the minimum payment and, if you can, pay the balance in full.

Mortgages: Consumers can shave time and interest expenses off their mortgage by making half of their standard mortgage payment every two weeks (effectively making one extra payment each year). What a great way to spend and save money!

Spending Wisely

Now for the fun part! Spending a third of your refund on yourself doesn't mean being frivolous or irresponsible. You can use your refund to:

Take care of home and auto maintenance, and especially repairs. If you don't have health insurance, maybe you could use the refund money to obtain or increase coverage.

If you've been putting off health and dental checkups, which could prevent bigger and more costly problems later in the year, this would be a good time to do it.

Is there anything that your family could use all during the year that might save you money in the long run? What about an annual membership to AAA or insulating the windows in your home to save on utility costs?

Invest in your future. If you've always wanted to start a business or go back to school to further your education or training, you could see your refund double many times over by taking those steps now.

Lastly, even if money is tight, taking a well-needed vacation might be a good idea. We all need a break now. However, you don't have to spend a fortune to have fun! Before you go, decide how much you have to spend on a vacation and stick to your budget. Check for good deals on airfare and hotels. To cut costs on eating out, stay in hotels that have refrigerators and microwaves in the room.

Visit HSBC's consumer financial education website, www.yourmoneycounts.com, for more information on budgeting, investing and money management.

Visit the Internal Revenue Service website, www.irs.gov, for more information regarding the Economic Stimulus program.