Personal Finance: Making tax refunds part of a strategy

Your tax refund may never be more valuable than it is now, regardless of size.

With the pressures of the recession and credit card companies turning into Scrooges, this is a good time to look at your tax refund to help build a safety net and strengthen your future. Here are some ideas:

Sanity first. Many people look at tax refunds as an opportunity to spend.

This year, however, change your thinking: Look at the refund as a chance to insulate yourself from a job loss or other financial pressure.

People who deny themselves pleasure sometimes resent it and overspend during financial stress. It is akin to wanting junk food when you start a diet.

Instead of taking a chance that you will binge on spending, use a small percentage of your refund, maybe 10 percent, to treat yourself and reserve the rest to improve your financial life.

Set up an emergency fund. With unemployment likely to climb above its present 8.5 percent rate, you need backup savings to last you awhile in the event you lose your job. Financial advisers typically suggest having at least enough to cover three to six months of basic living expenses - mortgage or rent, food, electricity, bare-bones telephone service, car payments, and gasoline or transportation costs for job hunting.

Given the severity of the recession, a year of savings would be better.

If you'd like to save for retirement or college, but are afraid you do not have enough emergency savings, one account can provide more options: a Roth individual retirement account, which you can open at a bank, mutual fund company, or discount broker. Select a CD or a money market mutual fund as your investment choice.

If you navigate the recession without touching that account and have more than five years before retirement or the start of college, that money can be invested in a balanced mutual fund or stock mutual funds.

The IRS allows you to put up to $5,000 a year ($6,000 if 50 or older) into a Roth IRA, and the account can be used for college or retirement. If you lose your job, you will be free to take out your entire deposit.

Get rid of credit card bills. Banks and credit card companies are worried that, in the midst of the recession, you may miss payments. So they are cutting off additional credit for those people with large amounts of debt.

Use your refund to pay off your high-interest cards first. If you pay off a chunk of debt, you might be able to transfer the balance to a low-interest card.

If your refund makes a dent in your balance, keep paying what you were paying under the higher balance. This will wipe out your debt fast.

Secure your credit cards. If you have unused credit cards sitting in a drawer, haul them out and use them for a small purchase on something you have to buy anyway. Then, immediately pay off the purchase with your refund.

Banks are closing access to credit cards that are not being used. You don't want that to happen, because you might need all your cards as a backstop if you lose your job.

In addition, when you close a credit card, your credit score will dip if you have a lot of debt outstanding on other credit cards. Why? Because your score partially depends on the amount of available credit you use. Avoid using more than 30 percent of your credit.

Start-again money. When people lose dead-end jobs during a recession, they often decide to go back to school to start a new career. Federal Stafford and Perkins student loans can help with the expense.

Stashing away your refund will help with housing, food, or other necessities while you try to build a new life.