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10 Smart Ways to Spend Your Tax Refund

Geoff Williams
Thinkstock

P is for practical.

Hotly anticipating your tax refund? Us too. But before you splurge on that Jacuzzi you've always wanted or pile items into your virtual shopping cart, do yourself a favor: Hit pause, experts suggest, and consider finding a practical use for your money. What's practical, of course, is relative to your circumstance, but mull over these ways to spend your check from Uncle Sam.

Start an emergency fund.

Boring, you might think, but if you have an emergency later, you'll decide that taking this step was a brilliant masterstroke of financial intellect. If you don't have at least $1,000 saved up for worst-case scenarios, earmark your tax return to build this safety net, says Clare Levison, a certified public accountant in Blacksburg, Virginia, and the author of "Frugal Isn't Cheap: Spend Less, Save More, and Live Better." And if you already have an emergency fund, there is no harm in adding to it.

Pay off debt.

Even if it isn't as much fun as taking a vacation, paying off debt is a smart idea. "Start with credit cards, or heaven forbid you have any of those payday loans, put those on the priority list as well," Levison says. You could also pay down a car loan or home equity line of credit, she adds. "Most people have some form of debt they could use their refund to pay down."

Sock the money away in a savings account.

Interest rates average just .017 annual percentage yield for savings accounts these days, according to data from GOBankingrates.com. So if you find a savings account or CD offering 1 percent interest, that's considered great. And if the odds are good that you'll still spend part of your tax refund on this-or-that thing you'll wear once, putting the rest in a savings account could help you make a little extra cash in interest.

Save for an upcoming expense.

Be proactive and save for those purchases you know you must make in the near future. After all, not budgeting for necessary but irregular expenses is a classic way to create financial problems. "Are you going on vacation? Is your vehicle going to need new tires soon? Is your washing machine nearing the end of its useful life?" Levison asks. "Get ahead of the game by planning and saving for an upcoming expense."

Repair something in your house.

Something always needs to be repaired or replaced, doesn't it? Your house is probably your most valuable asset, which likely justifies spending the money on your home. Besides, you might find that money spent now saves you more in the long run, says Brian Porter, professor of management at Hope College in Holland, Michigan. "A high-efficiency furnace, cost-effective appliances or new windows that aren't as drafty will make the home more enjoyable and may save money on utility bills," he says.

Pay it forward.

It may not help you, but you could use the money to help others. "If a tax refund is an unexpected windfall, then it won't be missed if it's given away," Porter says. "Find a charity and worthy cause and give generously. The gift may even decrease 2015 taxes if deductions are itemized." CharityNavigator.org has a helpful primer on the types of charities you might donate your refund to.

Put the money toward your retirement.

You could start an individual retirement account or a 401(k), or better yet, if you have one already, use the money to add to it. "Most Americans don't max out either of these, so there is probably room to invest more," Porter says. "The contribution may provide an added bonus of a tax deduction, making the tax refund even larger in the long run."

Put the money toward your child's college education.

Your kids are only getting older, and you're going to be looking for colleges before you know it. "Open a 529 fund for children or grandchildren," suggests Ernie Almonte, chairman of the National CPA Financial Literacy Commission. If you already have a 529 plan, add to it. "Investing the tax refund into a 529 college savings plan will help defray the cost of college while providing a tax break," Porter says.

Travel.

If your debt is under control, and you don't have any looming financial problems, go ahead, put the money toward a vacation or mini-trip if you really want to spend your refund on something fun. While this might sound precisely like what you shouldn't do, Porter says research has shown that buying experiences versus material items "provides greater long-term happiness." That way, Porter says: "The tax refund may contribute to a lifelong memory."

Be half smart.

If the idea of being practical with your money is killing you, that may not be an unreasonable feeling if you always work hard and never seem to get a break. On the other hand, maybe you always feel behind financially because you never do smart things with your money. So you could split the difference, Almonte says. "Take half and go on vacation and save the rest."

Bonus tip: Make sure you don't get a big refund next year.

If your refund is significant, change your paycheck and adjust the withholding allowances, says Rodney Harano, a certified public accountant based in Honolulu. "I'm a big believer of not getting large refunds," Harano says. What's the ideal refund? There's no right or wrong, but if your refund is, say, $2,500, and your annual income is $50,000, that's 5 percent of your income you're loaning interest-free to the government. Tinker with your exemptions, and you may give yourself a raise.



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