Five Smart Strategies for Spending Your Tax Refund

For the 2012 tax year, taxpayers are receiving an average refund of $2,900 according to the IRS. If you’re on the receiving end of a substantial tax refund, you may be tempted to splurge a little. While you may be dreaming of a new flat-screen TV or a trip to a tropical destination, there are betters ways to put your tax money to work. Before you blow your tax refund on luxuries, consider these smart spending strategies.

1. Plan for a Rainy Day

If you don’t have a reserve of emergency cash set aside, the slightest hiccup can turn into a major money crisis. Financial experts typically advise setting aside anywhere from three to nine months’ worth of expenses in an emergency account and your tax refund can help you get started. Stashing the money in a savings or money market account won’t earn you a lot of interest but it can help you create a buffer between yourself and financial disaster.

2. Improve Your Home

Your home is one of your biggest assets and taking care of it properly can ensure that you get the best return. Using your tax refund to cover repairs, maintenance or improvement projects can potentially put more money back in your pocket in the long run. Installing energy-efficient appliances or investing in green improvements such as solar panels or a thermal water heater could also net you significantly more at tax time in the form of a tax credit. If you want to save on your mortgage, you could also use your refund to cover closing costs and fees for a refinance.

3. Work On Your Estate Plan

If there are other people who depend on your financially, such as a spouse or children, you need to make sure that they’ll be protected if something happens to you. For example, if you’re worried about what will happen to your assets after you’re gone, drafting a will and establishing a trust allows you to specify your wishes. If you’re the primary breadwinner, having the right amount of life insurance in place can protect your family financially after your death. If you don’t have any a will, trust or proper insurance, your tax refund can help you kick-start your estate plan and give you greater peace of mind.

4. Dump Your Liability

If you’re carrying around liability, chances are you’re paying more in interest than you could ever hope to earn by putting your refund money in a savings account. Liability is not only expensive it also acts as an obstacle to achieving your other financial goals. The longer you’re paying interest to credit card companies, the longer you’ll have to defer your dreams of saving for a home, building your retirement nest egg or saving for your child’s education. Using your tax refund to wipe out that high-interest liability can help get you on the right financial track.

5. Invest in Yourself

If you’re interested in learning a new skill, continuing your education or simply improving your well-being, your tax refund can help you make a wise investment in yourself. Earning an advanced degree or obtaining a professional certification can be a stepping stone towards the career change you’ve been dreaming of. Not only will you boost your earning potential but you could also take advantage of some key tax credits if you’re paying out-of-pocket for your education expenses.

While it’s tempting to think of your tax refund as “free” money, spending it wisely can give you a bigger bang for your buck in the long run. Instead of rushing out to buy the latest electronics or a new spring wardrobe, think about how you can use your refund to build a solid foundation for your financial future.