What to Do With Your Tax Refund

Carla Fried

The average federal tax refund amount is more than $3,000. Don’t worry; I am not going to launch into a finger-wag on why it’s smarter to not get a tax refund by adjusting your withholding amount. Yes, I know that’s the standard advice, but hey, another way to look at this is that you just had Uncle Sam help you with some forced savings. And with bank savings rates so low, you didn't really lose out too much in foregone interest. The one caveat though is that you have to be extra smart in what you end up doing with your tax refund.

Here are my suggestions on how to get the most out of this year’s tax refund; I’ve listed them in order of their financial appeal:

• Pay down high interest credit card debt. A no-brainer, right?

• Invest in your 2011 IRA today. Rather than wait until early 2012 to get around to funding your 2011 IRA, do it now. That puts your money to work 9 months to a year earlier; giving you a leg up on compounding over years. And hey, if you just do it right now you don’t have to worry that other needs and wants will tug at your throughout the year and get in the way of funding your IRA. In 2011 anyone younger than 50 can invest up to $5,000 in an IRA; over 50 and you can contribute $6,000 this year.

• Put it in your home down payment fund. If you currently rent and have a goal to eventually own a home, the reality is you will need to save up for a down payment. Yes, FHA-insured mortgages require just a 3.5 percent down payment, but if you want to get a conventional mortgage –and the government is slowly trying to wean borrowers off of FHA-insured loans--lenders are now requiring down payments of 10 percent to 20 percent.

• Make an extra mortgage payment. Already own? Okay, if you’re in your mid to late 50s and you plan on living in your current home in retirement, getting the mortgage paid off before you stop working is a great way to eliminate one of your biggest monthly costs. Making one extra mortgage payment a year can reduce the payback time on a fresh 30-year mortgage to 22 years. Just be sure you nail down with your mortgage servicer that 100 percent of your extra payment is to go toward the loan principal; don’t let ‘em use a penny for interest.

• Take a Vacation. Yep, you read that right. Spend some money relaxing.  Recharging the batteries is how you stay ahead of the curve on the job. Over time those vacations are part of what makes you a candidate for raises and promotions.