Five Smart Ways to Spend (and Save) Your Tax Return

According to the IRS, the 2010 tax refund for the average American was around $3,000.  That’s a pretty substantial chunk of money.  Chances are, you already know how much to expect back from Uncle Sam this year – and you probably have some idea of what you want to do with the money when it lands in your bank account.

It’s easy to get swept up in fantasies about blowing your entire tax return on fancy techno-gadgets or a new designer wardrobe – but splurging a big-screen TV or an all-day shopping spree probably isn’t the best way to spend your tax return.

If you’re getting something back from the IRS this year, here are a few ways you can make the most of your money:

1. Don’t spend your tax return before you get it.  Don’t make purchases with your credit card, and don’t put down a deposit on a big-ticket item with the intention to pay the rest when you get your tax refund.  A tax return can take several weeks to process, and a lot can happen in that time:  You might have an unexpected financial emergency, like a major home repair.  Your refund might be smaller than you thought it would be, or it might come a few weeks later than you expected.

2. Pay yourself first.  Use your tax refund to start an emergency fund, or put a portion of it in a retirement account or a Roth IRA. Not sure how much to save?  I recommend saving at least a third of your refund – but if you can afford more, go for it!  Your future self will thank you.

3. Pay down your debt.  If you have credit card debt, try to pay off (or at least pay down significantly) your outstanding balance.  If you have more than one card with a balance, choose the card with the highest interest rate and focus on that one.

4. Make purchases that will help you save.  For many folks, a tax refund provides a rare opportunity to pay cash for a big-ticket item.  Maybe your 1980s-era refrigerator is on its last legs, or maybe your washing machine has seen better days.  If you’re planning to buy a big-ticket item with this year’s tax return, try to buy something that will save you money in the long term, like an energy-efficient model that will cut down on your electric bill for years to come.

5. Treat yourself (a little).  There’s nothing wrong with having a little fun with your tax return – as long as you don’t go overboard.  Allow yourself a set amount – say five percent of your tax return – and use it however you want.  Go to dinner at a nice restaurant, buy that new pair of running shoes, or renew your subscription to a favorite magazine.  But remember:  when that money’s gone, it’s gone – no exceptions.

Are you expecting a refund this year?  How do you plan to use it?  Leave a comment and let me know!