Personal Finance: Tax refund begins your money plan

Be kind to yourself.

The average tax refund coming to taxpayers this year is $2,952, and some people will be so kind to themselves that they will turn it into $20,000 or even $50,000. How? Here are three ideas that will turn $2,952 into a hefty sum:

Save for retirement. If you are among the people who have no idea where to find money to start or prop up their retirement savings, your tax refund can supersize the possibilities.

Let's say you are 25 and decide to open your first individual retirement account. You go to a mutual fund company such as Vanguard, Fidelity, or T. Rowe Price and ask to open an IRA, and put the entire $2,952 into a balanced mutual fund.

The manager of that fund will divide your money roughly 60 percent into stocks and 40 percent into bonds. So you will have a diversified investment with a single mutual fund. By the time you retire, your $2,952 should become about $50,000 if it grows an average of 7 percent a year, the average gain over the last 84 years, which, of course, isn't guaranteed.

If you are 35, that $2,952 in the same mutual fund should treat you well but not as well as for the 25-year-old who got a 10-year head start. For a 35-year-old, the likely outcome at retirement is about $26,000.

At 45, your refund will still do you good in an IRA, but now you have just 22 years to retirement, so $2,952 is likely to grow only to $13,000. At 55, time is getting away from you, but you can still double your money by plopping the refund into an IRA. You should get to about $6,200. If you add $2,952 more to the IRA every year until retirement, you could accumulate about $56,000.

If the 25-year-old added $2,952 each year, the result would become about $800,000 by retirement. Want to check out the effect of your refund? Play with the compounding calculator at tinyurl.com/2f8dyw

Get debt off your back. Let's say you have $5,000 in credit card debt and are running up interest charges at a rate of 15 percent annually.

You would love to get rid of this lead weight once and for all.

In fact, if you could finally be free of this pressure in a year, that would be delightful. But to do that, you are going to have to make monthly payments of $451, which might be out of the question if you still intend to eat.

But what about if you use your full $2,952 refund to remove that lead weight on your financial life?

You have only $2,048 left on your credit cards, and you can wipe it all away in a year if you make yourself pay $185 a month on your credit cards and do not use them again while doing it.

Whipping those cards out again will only undo all your hard work. So use a debit card instead of your credit cards, and set up your credit card payments to automatically take $185 out of your checking account each month. To understand how long it will take you to pay off your debts, try tinyurl.com/3n4vtau

Start a college fund. If you started saving for retirement in your 20s, putting 7 percent of your pay in a 401(k) plan at work and getting a 3 percent match from your employer, you probably are doing well with your retirement savings. But maybe you have let college go, and your child is getting older by the day.

If you plop that $2,952 refund into a 529 college-savings plan offered by a state and earn 7 percent on average each year for the next 10 years, today's 8-year-old should have about $6,000 for college. Stash away $2,952 each year and you will make real progress, about $50,000.

Choose a 529 plan with the lowest fees to be sure that as much of your money as possible works for you. You do not need a broker to do this. On your own you can select a 529 plan offered by any state. Consider your home state first if it offers a tax break, but also examine expense ratios and investment quality, because low expenses leave you more money. Learn about your choices at SavingForCollege.com