5 Smart Ways to Spend Your Tax Refund

Roughly three quarters of Americans will get a tax refund this year averaging about $3,000. Not a bad payday for most of us!

If you’re going to receive a refund this year, spend it wisely.

If visions of shopping sprees have been dancing in your head, I strongly suggest you put those fantasies on hold until you’ve answered the following questions:1) Have you paid off the balances on your credit card(s)?

If you answered no, I can’t emphasize this enough: use your refund to pay off as much of that debt as possible; this is by far the best financial investment you can make. If your card interest rate is 12%, you are in essence guaranteeing a 12% return on your investment. As lame and boring as it might seem to use your refund for this, do it. Now. You’ll be much better off financially.

2) Do you have at least three months of living expenses tucked away?

Experts recommend having three to six months worth of living expenses in liquid savings to cover “just-in-case” issues like a major car repair, a medical problem or an unexpected job loss. This “emergency” or “rainy day” fund will protect you from unexpected financial issues. So if you answered no, dump that refund into your savings or money-market account and build up your emergency fund--the peace of mind is worth missing out on the shopping spree.

3) Do you have enough life insurance?

If you own a home or have children, you should have life insurance coverage equal to eight to 10 times your annual income. The price of insurance varies depending on your health and the type of insurance you want. For younger people, term insurance is usually the cheapest, so if you don’t have enough protection, start with term first and see if you can get the coverage you need.

4) Have you saved enough for your short-term goals?

Are you planning on taking a vacation this year, or do you plan on blowing it out for the holidays? If you are planning something and you answered “no,” then dump your refund into an account specifically dedicated to an annual vacation or holiday fund. This will make sure you don’t have to go into debt to go to the beach or buy presents.

5) Have you given to your favorite worthy cause?

If you answered “yes” to all of the previous questions, then you are in great financial shape and now is a great time to think about making a donation to a worthy cause that matters to you. I can promise you that the organization you choose to support will be extremely grateful. And the satisfaction of knowing that you’re making a difference will bring you great happiness—and what can be better than that?

If you are getting a refund this year make sure you’ve thought through the options before you hit the mall. Be smart and good luck!

Bryan Link is the CEO and co-founder of SimpliFi, an online consumer financial planning service. SimpliFi has won several awards and was named Fast Company’s Top 10 Most Innovative Companies in 2010. Bryan’s expertise in personal finance has led to him being featured in a variety of print and broadcast media, including ABC News, FOX Business and The Wall Street Journal.