What to do with that Tax Refund
Five Ways to use that Money Wisely

Two thirds of those who filed income taxes can expect some sort of a refund. Based on last yearıs statistics, 59% of the people who received a tax refund were planning on spending it on every day purchases and or to pay off their bills. So far this year, the average refund is up 5%. And as tax season draws to a close, at least for most Americans - 9.6 million of us are filling a six month extension this year, it is time to think about the best way to use that refund.

While the best scenario is zero tax liability, few of us seem willing to try. Shame on us. We complain about taxes yet we give the government money they are not entitled to, allow them to hold it for a year, and then we acted very excited when they return it - interest free. The average refund for 2005 will be $2,500. That's $52 a week that could have been in your pocket, your savings, or better yet, used to pay your bills!

For many of those that receive this type of refund every year, plans have already been made on how to spend it. Each year, taxpayers get that money as fast as possible often spending money to get what they have coming. Many of those taxpayers have used quick refunds, refund anticipation loans, or quick deposit debit cards.

Over 53% of the taxpayers how filed in 2006, opted for some sort of early refund. Perhaps we can change that turning a bad situation into something a little better. For those who are receiving a refund they may not have expected, here are some useful tips on what to with that financial windfall.

Afterwards, I will explain how to fix this financial faus pax so that this tax year will work for you and not the federal government.

1. The first thing you should consider is your debt. Doesn't sound like much fun, using that unexpected cash to pay down your debt, but with the average credit card bill running upwards of $8400 it is the best move you have available. The longer that debt stays on your high interest credit card, the harder it is to pay it off.

2. Most financial professionals worth their fees would recommend that, providing you do not have the aforementioned credit debt, that you take the money a build that rainy day account. For some, that $2,500 might amount to only one sixth of what is usually recommended; for others it might be an emergency mortgage payment or two. Either way, putting that money in an interest bearing money market account - and some of those are paying upwards of 4.5% with some limited check writing privileges or a six month CD - some of those are paying 5% or more, would secure the cash and make it less likely to be spent frivolously.

3. Use the money to spruce up the house. This would turn a bad situation better creating an opportunity to increase the value of your home. How many people woke up one morning and realized that the house they were living in was valued at more than they could probably afford to buy at current market prices or that the value of their home was now a predominate measure of their own wealth or retirement? In most cities, that number is probably in the tens of thousands. Taking that money and using it for curb appeal renovations or small remodeling repairs will not only make you home more livable but worth much more as well.

4. Saving for retirement is a sure fire way of getting a substantial return on that cash. A tax refund is not taxable. It is money you earned, loaned the federal government for a year and they refunded to you upon request.. So invest the money in a traditional IRA. While only 33 cents on each dollar will be deductible against next year's tax bill, thatıs a 33% gain on top of any you might receive from the investment itself.
(It is amazing how much money that has yet to be refunded sits in the Treasury vaults. In fact, over $2 billion in refund money is still left unclaimed from 2002 and an average of 10,000 checks each tax season are deemed non-deliverable.)

5. Start that vacation savings. There is a certain allure in buying a wide screen television or some other big-ticket item, but come summer, we will still be thinking about taking some time off. Use that refund as a down payment on your vacation savings. Vacations are, after Christmas, the largest generator of long-term debt. We spend too much on them and save too little to get to them. Even the smallest refund can get you started on a much more affordable, debt-free vacation.