5 Smart Ways to Invest Your Tax Refund

Post date: Jun 19, 2011 3:58:15 PM

Now is a good time to start thinking about your income taxes. After all, April 15th will be here sooner than you think. If you are expecting a tax refund this year, why not invest the money wisely? Here are five ways to spend your refund on something that will help you get a jump on your 2011 financial goals.

Pay Down Credit Card Debt

If you are like many Americans, reducing credit card debt is a top priority this year. Given that many banks and financial institutions still charge upwards of 14% on their credit cards and less than one percent on a regular savings account, it doesn't take a business school graduate to know that paying down the card debt is a better financial move. What's more, retailers have known for years that Americans are vulnerable to spending their tax refund without much thought or discipline. "Many consumers look forward to tax season, when they know that the government will be padding their pockets with a little extra cash," NRF President and CEO Tracy Mullin said in a statement. "Retailers begin to offer special sales and promotions in early April in anticipation of consumers hitting the stores with extra money in their wallets." Don't cave in. If you haven´t experienced it yet, the exhilaration of eliminating credit card debt is a wonderful thing.

Buy A New Car

If your current vehicle is more than seven years old, has lots of miles on it, or is costing you too much in repairs, now is a great time to buy a new car. You could use your tax refund as a down payment and keep your savings account intact. Despite some recent good news from Detroit, automobile manufacturers are still struggling in today's economy. Price discounts, rebates, low financing deals and a wide selection of vehicles are still the order of the day. Plus, auto loan interest rates are still under 6%, which is still low. Plus, there are lots of good deals on new 2010 vehicles. Dealers are trying to sell their remaining fleet from year-end. You can get a good price and a good loan rate on a brand new 2010 vehicle.

Start a College Fund

Even though the cost of college keeps rising each year, it's still one of the best long-term investments you'll ever find. Why not take your tax refund and get a jump on college expenses for your kids? Many financial professionals suggest a College 529 Savings Account for your child. "A 529 Plan is a vehicle that allows you to save for your child's future education costs," says Natasha Verbsky, a financial advisor with AXA Advisors, based in Dallas, Texas. "It can be used for tuition, room and board, required books and fees associated with undergraduate school, graduate school and technical training." One of the biggest benefits of a 529 plan is that the funds will grow tax-deferred. All withdrawals used for qualified education expenses will be distributed tax-free. Now that's smart investing.

Pay Your Property Taxes

For many homeowners, just keeping up with the monthly mortgage payments can be difficult in these tough economic times, let alone coughing up thousands more for property taxes. But if you use your tax refund to pay your property taxes, the financial hit to your pocketbook is minimal. That is, you probably won't have to take money out of your checking or savings account to pay your taxes. In fact, you might even have some extra money left over to reward yourself. Granted, it's not the most exciting thing you can do with the money, but consider that you'll have to pay your property taxes either way. By handing over your tax refund to your tax assessor, you won't have to hassle with paying your property taxes until next time.

Establish An Emergency Fund

Even though it is hard to resist the temptation of spending "free money" from the IRS, having a "rainy day" cash fund on hand to meet emergencies is a good idea. "The average person that gets a refund, thinks 'oh good,' but doesn't think a whole lot about it," Theodore Sadar, a certified financial planner, said. But while spending those dollars on a lavish vacation or a new TV can be very satisfying, Sadar suggests leaving it in the bank instead.

If you decide to heed our advice with your tax refund, checking your 2011 credit is a smart idea. For example, if you pay down your credit card debt, check your credit report to make sure the payments were applied to your outstanding card balance. Or if you're shopping for a new car, knowing your credit score before you take a test drive is a wise thing to do, since higher credit scores usually mean lower interest rates and more favorable terms on a new loan, which could save you a bundle of money.