Top 5 Smartest Ways to Use Your Tax Refund

 The average tax refund in 2008 was $2429 with predications the average 2009 refund will be higher.  We could all use the extra cash in these tough economic times to pay off our debt and save as much as we can, but what is the best way to use your surprise windfall in our cash-strapped economy?  Read our top 5 tips and find out.

Save, Save, Save

With the world economy locked in a recession and unemployment at a 25 year high, your best bet is to save it.  In good times, financial experts were advising a cash reserve of 3-6 months of living expenses, but since it is taking the average job seeker longer to find a job, a cushion of 6 to 9 months is now recommended.   Living pay check to pay check is especially dangerous these days since the credit market has dried up even for people with good credit.  Stop all frivolous spending and place your refund and extra monthly income in an easily accessible account like an FDIC-insured money market account.

Pay Off Credit Card Debt

If you are carrying any high-interest credit card debt pay it down or pay it off with your tax refund.  Start with your highest percentage cards (usually department stores which charge a mammoth 22% or higher) and work your way down.  Confused on whether you should pay off debt or build up a cash reserve?  Financial advisors recommend any card charging more than 10% interest needs to be paid off first before starting on your emergency fund.

Invest

Stocks are slowly starting to climb after their 40% nose dive last year and now is the time to take advantage of their low prices.  If you have no credit card debt, a good emergency fund, and money you won’t need to touch for at least 5 years then look at getting into the market.  There are many different theories on investing but a basic starting point is buying an index fund.  It protects you from volatility and gives you diversification at a low cost. Remember you don’t need tens of thousands of dollars to invest.  Even starting with a few hundred dollars can reap a big reward over time, but you have to start somewhere.

Refinance Your Mortgage

With 30-year mortgage rates hovering below 5% this spring, it may be a good move to use you tax refund to pay for part or all of your closing costs and refinance.  To make it worth your while, make sure you’re able to knock off at least 1 percentage point. You’ll also need to have a bit of home equity and a good credit score (720 or higher) to qualify for the lowest rate. Anyone with an adjustable-rate mortgage (ARM) should definitely try to switch to a fixed rate mortgage.

Invest in Yourself

Polishing up interviewing skills, learning a new computer program or meeting with a career coach maybe a good investment of your tax refund if you are currently job hunting or think you will be soon.  With high unemployment rates, job competition is fierce so standing out from the crowd with a top-notch resume or sharp interview skills means you’ll land a job faster.

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