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Best ways to spend your tax refund: Keep spending small and saving big

By , - Last modified: May 18, 2012 at 1:23 PM

Last year, the average tax refund was just more than $3,000. Although it might be tempting to dash out and buy something brand new and shiny, curb that impulse and ponder your options.

It’s OK to give yourself a little treat, but remember the IRS isn’t sending you that money just because you’re cute. That’s your hard-earned money, so consider using it in ways that can potentially help you out in the future. Here are some top tips for your tax refund:


Pay down debt

If you have high-interest credit card debt, medical debt or car loans, consider using all or part of your refund to pay down your balance. Reducing high-interest debt whenever you can is always a good idea.


Invest in your future

Studies show that 68 percent of Americans aren’t saving enough for their retirement. Don’t be a part of that statistic. Use your refund to put more money into an Individual Retirement Account, 401(k) or a mutual fund. You might even consider a savings account or certificates of deposit with the best rates you can find.


Invest in your kids’ future

If your retirement fund is strong, consider investing a little extra in your child’s college savings plan this year.


Create an emergency fund

Many people say they plan to start an emergency fund, but they don’t do it. Now that you have extra money in hand, it’s time to take action. Experts recommend having six months’ worth of living expenses on hand for unforeseen circumstances. Get your fund started with your refund, and then add to it each month to tide you over in difficult times.


Make an extra mortgage payment

If your goal is to pay down your mortgage, just one extra payment per year toward the principal could reduce the interest paid over the life of your mortgage by thousands of dollars.



Mortgage rates remain low. If you haven’t looked into refinancing yet, do some investigating to see if you’d benefit. You could save thousands over the life of your mortgage, and your tax refund can help foot the bill if any fees are involved.


Do what you’ve been putting off

Things like a non-life-threatening medical procedures, dental work, braces for the kids or tires for the car might have seemed like luxury items when you didn’t have ready cash. Now you do. Use it wisely.


Reward yourself

Treat yourself to something you’ve been wanting, as long as you can cover the cost without adding to your credit card bill. Knowing you’re not adding to your debt will make the reward even sweeter.


A CPA can help

If you continually receive large refunds year after year, you need to take a look at your withholdings on your W-4 statement — the form you completed for your employer when you were hired. By adjusting the withholding, you can correct the amount of federal income tax from your pay. If your financial situation has changed, you need to change your withholdings.

It is important to stop overpaying the government with your money. Ideally, at the end of the year, you don’t want to owe the government anything, nor do you want the government to owe you anything. You can use the money you save to increase your contribution to your 401(k) plan, for example.

If you do continue to receive a refund, give careful thought to how you use it. Allow yourself a small reward, then use the rest in such a way that you’ll receive a much larger reward in the future.

For more information about Pennsylvania Institute of Certified Public Accountants (PICPA), visit

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