taxes

7 smart ways to spend your tax refund

Man holding up a large stack of bills
Highlights
  • Save a three-month emergency reserve of all your fixed expenses.
  • Use your tax refund to pay down credit cards with high interest rates.
  • Stash away money in a 401(k) or start an IRA for your retirement.

You've paid your debt to Uncle Sam all year, so if you get a little cash back as a tax refund, be sure to make the most of it.

In 2009, the average tax refund rose to $2,683 from $2,371 in 2008, according to IRS reports. If recent trends continue, that number could go even higher this year. That kind of money can help give you a serious jump-start on securing your financial future.

Average tax refunds 2005-2009
Source: IRS

Before you buy that new living room couch or book that trip to Disneyland, consider spending your tax refund on things that will give you the biggest bang for your buck. Here are seven smart ways to spend your tax refund.

1. Bulk up your emergency fund. Living paycheck to paycheck may have been fine when employment was low and getting credit was easy, but these days, building a financial emergency fund is critical.

"A three-month emergency reserve of all your fixed expenses -- mortgage, utilities, food -- is ideal," says Jessica Cecere, president of Consumer Credit Counseling Service of Palm Beach County and Treasure Coast in West Palm Beach, Fla. "But even if you only put $1,000 into a savings account, you'll be better off than a lot of people."

2. Lighten your debt load. The minimum payment you make on your credit card may seem like no big deal. But over time, the money you spend financing your debt, especially if you have an interest rate of 15 percent or higher, can double or even triple the cost of every item you buy on plastic.

"Your tax refund is an opportunity to make headway on your credit card debt," says Jerry Love, president and chief executive of Davis Kinard & Co., an accounting and audit firm in Abilene, Texas. "Do you really want to be paying for yesterday's lunch for the next 18 years?"

3. Invest in your career. Getting a big promotion or shifting to a higher-paying career often requires developing new skills. Spend money on continuing education courses, a weekend conference or an online class to learn a new skill.

"Many continuing education courses start at just a couple of hundred dollars," says Steven Katz, spokesman for Chicago-based TransUnion's financial management Web site zendough.com. "Invest in your education and you'll have more earning power in the future."

4. Get a home energy audit. Home energy audits can cost anywhere from $25 to several hundred dollars, but the information you get can help you save far more over the long run, says Kip Kiebke, chief executive officer of New Financial You, a credit counseling service in Hartford, Conn. The audit can show you where to seal up leaks and add insulation.

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"With the energy saving measures, utility expenses can be reduced for years, thus saving the homeowner money," Kiebke says.

5. Add to your retirement account. You have plenty of options for stashing money away for your retirement years, but in general you'll want to first max out any account that includes an employer match. The free money is just one of the benefits, says Cecere. "Most of the time, that money will come straight from your paycheck so you won't even see it," she says.

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