Chances are you are among the nearly 80 percent of Americans who will receive a refund from the IRS this year. With the 2011 average return being $2,913, you may find yourself with a large chunk of change.
Before dreaming up all the goodies that money could buy, consider these ways you can wisely spend your refund.
Pay down debt
This is not how most consumers want to spend their refund, but paying off your loans will help you save in interest and fees in the long run. Start with your highest-interest-rate loans first. Oftentimes, this will be a credit card. Since the average U.S. household has $16K in credit card debt, your payment may only make a dent in the outstanding balance, but will still save you considerable interest on future payments.
Though the economy is improving, there’s always a chance you or your spouse could suffer a job loss. It’s not pleasant to think about, but it is prudent to prepare for such an event. While experts recommend having at least three months of liquid savings on hand, recent unemployment lengths have averaged closer to 10 months, so save as much as you can.
You may also consider how to improve your chances of finding a new job if you were to be laid off. Applying your tax refund to job training, continued education, attending a conference or even investing in a new suit for a job interview are all ways to increase your chances of getting hired.
Create a contingency fund
Losing a job can be a major financial setback, but there are smaller events that can also cause financial hardship if not anticipated. Set aside some of your refund to pay for that inevitable car repair, appliance replacement or root canal so you don’t have to incur debt to cover these costs.
Consider keeping your emergency funds in an online savings account, which usually offers higher interest rates than traditional savings accounts, but still provides quick access should you need to tap into the funds.
Contribute to retirement
If your employer has a 401(k) plan, participate! It’s the easiest way to make a guaranteed return. While you can’t drop your entire refund directly into a 401(k), you can put it in a savings account, set up a recurring transfer to your checking account, then have your employer increase your contribution by taking out a few more dollars from each paycheck. Because your refund will keep your paycheck at its current level, you won’t even feel the pinch of the increased contribution.
Set up a college fund
It’s never too early to start saving for your child’s education. Many banks have accounts specifically for kids that offer generous savings rates. You may also consider depositing funds into the Utah Educational Savings Plan (UESP), a non-profit trust fund offered by the state that allows investment earnings to grow federally tax-deferred. As long as the funds are used for qualified higher education expenses of the beneficiary at an eligible educational institution, earnings from an account are not subject to federal income tax.
Get a home energy audit
For a small fee, you can have your home audited to identify ways to increase energy efficiency and reduce your energy bill. This could prove especially beneficial to owners of older homes. Questar Gas is currently offering home energy audits for $25, the amount of which is refundable if you follow through on the audit’s recommendations.
Have a little fun
Last but not least: have a little fun with your tax rebate. It’s appropriate to set aside a small portion of your refund to treat yourself and your family. Go to a nice dinner or concert, or visit that local attraction you’ve always wanted to see. You’ll rarely regret spending a modest amount of money to create long-lasting family memories.
April 15 has come and gone; don’t let your tax refund do the same. Spend it wisely and enjoy the benefits for years to come.