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The 3 Smartest Things to Do With Your Tax Refund

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Getting money back from the Internal Revenue Service this year? Before you rush out to spend it all, consider these three ways to make the most out of your refund. (Haven't started your taxes? Why not do them this weekend?)

1. Kill Your Credit Card Debt

Every day you hold on to debt, it costs you money. The longer you have a balance on a credit card or high-interest loan, the more yo' have to pay in the long run. Ready for a scary example? If you make the 3 percent minimum monthly payment a $5,000 balance on a credit card with an 18.9 percent interest rate, your payments will total $10,188 -- and it will take you more than 17 years to pay the balance in full. A calculator from Bankrate.com will help figure out the interest you'll pay on your debt and how a little extra each month could make your debt disappear years faster. So put your tax refund toward knocking out your debt with the highest interest rate.

2. Boost Your Emergency Fund


If you don't have an emergency fund yet, use your tax refund to establish one. Emergency funds will provide you with the cash you need to cover unforeseen costs that might otherwise wipe out your monthly budget and even eat into savings that you had earmarked for other purposes. Need some motivation to keep contributing to your emergency fund? Join the Rainy Day Challenge and let a little gamification help you stay on track.

Unexpected expenses happen to everyone, so it's a great idea to be prepared. (Wondering what those unexpected expenses look like? Check out My $1,000 Day.) The rule of thumb is to have about three to six months' worth of net pay set aside in your emergency fund. If you're not there yet, use your tax refund to give your savings account the boost it needs.

3. Invest for the Retirement


Make your tax refund work really hard for you by investing in your future with the power of compound growth. If you contribute $2,000 of your tax refund into a Roth Individual Retirement Account and earn an average of 8 percent over the next 30 years, it would be worth more than $20,000. Plus, you might qualify for the saver's tax credit next year, so a contribution to your retirement account could help you get an even bigger tax refund next year.

If you have children, you can add your refund to a 529 plan to help pay for future college education expenses.

Whatever big financial goal you have, you can use your tax refund to help you achieve your goal faster. These three smart uses of your tax refund are great for building your financial security and well-being.

However, once you've done the responsible thing with most of your IRS windfall, splurge with 5 percent to 10 percent of it. Making smart financial decisions is important, but so is enjoying just a little extra money when you have it.

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