Using your refund to pay off a balance with an 18% interest rate is like earning 18% on your investments -- an incredibly valuable use of the money. And if you pay off your balances, you can afford to close some cards that are now charging high fees. For more information, see Close a Credit-Card Account to Avoid Fees.
Many people had to raid their emergency fund over the past year and had little extra money to restore it. You could use your refund to start rebuilding that fund, which can help you avoid landing in credit card debt if you have an emergency. Keep the money easily accessible in a money-market account or savings account that earns interest. See 7 Strategies to Build an Emergency Fund for more information.
Use the extra cash to buy shares in a mutual fund or stock you've been considering -- but may feel is too risky for your IRA or not available in your 401(k) plan. For example, if you want to invest in small-company stocks vetted by a pro, check out a new addition to the Kiplinger 25, the Homestead Small-Company Stock fund, which has a $500 minimum investment. Before you settle on individual stocks, consult our Stock Watch columns, including 16 Stock Picks for Risk-Averse Investors and 6 Tech Stocks for Dividends.
For less than $1,000, you can get coverage for flooding and liability.
Flood-Insurance Policy: If you live in a low- to medium-risk area, it costs about $350 to $600 per year from the National Flood Insurance Program with the maximum $250,000 in dwelling coverage and $100,000 for possessions. Get a price quote at www.floodsmart.gov.
Liability Insurance: Cover your legal expenses if someone is hurt in your home or by your car. It generally costs just $200 to $400 to buy a personal umbrella policy that provides $1 million in coverage over the limits of your auto- and homeowners-insurance policies. See Why You Should Have Umbrella Liability Insurance for more information.
It's always hard to juggle saving for college and retirement. Here's an opportunity to use your extra money to contribute to a 529 account. You'll be able to use the money tax-free for college bills, and you could get a state income tax deduction for your contribution. See 7 Smart Ways to Save for College for details.
You can use the extra money to contribute to a Roth IRA for your child. Your kid is eligible as long as he or she has earned income -- from mowing yards or babysitting, for example. Your child can contribute up to $5,000 or the amount of his or her earned income for the year, whichever is lower, and you can give him the cash to do it. See Open Low-Minimum Roth IRAs for Kids for more information.
Set aside some money for vacation rather than using your credit card and paying interest long after you have returned. Stash your refund in a separate account (see Why You Need Multiple Accounts), then add money automatically every week. You could also set up the account for other expenses -- such as a new car or holiday gifts.
Your refund won't be enough to redo your kitchen or bathroom, but it can pay for some smaller home improvements. Use the extra cash to add a backsplash, paint a room or cabinets, replace your bathroom sink, swap out your faucets, organize a closet, install a programmable thermostat or spruce up your yard. Here are 9 ways to add space and value to your home for $1,000 or less.
If you have your financial bases covered, consider using your refund to make a charitable contribution to help others in need. You'll feel good -- and you'll be rewarded for your good deed when you file your tax return in 2013 (charitable contributions are deductible if you itemize). Use our checklist to make sure the money you give is being used wisely.