Paying Down Debt With Your Tax Refund? Here Are 5 Smarter Ways to Spend It

From making crucial home improvements to socking away extra money toward retirement, try making one of these smart money moves

Most people typically us their tax refund to pay down debt or sock it into savings—good moves for the average $3,000 windfall, right?

No question. But given the state of the economy—improving, but slowly—here are some even smarter moves you can and should make with your refund now.

1.Invest in your home. With property values at historic lows for the last few years—and unemployment at record highs—many homeowners have put off key repairs and upgrades. Consider spending your tax refund to make much-needed fixes to windows, heating and cooling systems or put it towards shoring up the foundation or roof and replacing old appliances with energy-efficient ones. You’ll not only add to your home’s value, you’ll avoid being hit with a much bigger expense—and you may even lower your energy bills.

2.Secure your future. A staggering number—57%—of Americans have less than $25,000 socked away for retirement, a new survey finds. Now’s your chance to catch up. Open a Roth IRA (you can do this even if you have a 401k) and deposit up to $5,500 for 2013, $6,500 if you’re 50 or older. The money will grow tax-free—and you don’t pay taxes when you withdraw it in retirement either.

3.Upgrade your insurance. Most people take a set-it-and-forget-it approach to their insurance policies, but a yearly review is wise. From weather events to a personal crisis, life is full of surprises. If you’re wondering whether you have enough coverage, the answer is probably not.

Spend your tax refund to purchase the additional coverage you need. For example, a basic umbrella policy gives you $1 million in added liability coverage, over what your home or auto insurance covers, for $200 to $400 a year. If you’re in good health, you can get term life insurance policies for yourself and your spouse for less than $1,000 a year, combined.

4.Increase your deductible. If you increase the deductibles on your home and car insurance to $1,000, say, your monthly premiums will drop. But be smart about it: Make sure the amount you save puts some real money back in your budget. Then, stash $1,000 of your refund in an untouchable savings account to cover the higher deductible.

5.Think about the kids. You could put some or all of your refund into a 529 college savings plan, but for many families the looming cost of summer activities, child care and/or camp are far more daunting expenses. Sock away your refund so you can cover those bills with ease—and you’ll also insure that you don’t heat up your debt load this summer.

And don’t feel guilty spending on kid costs now, rather than saving for their futures. Just like the other four tips, the idea here is to use your tax windfall to cover some core expenses now, so that you’re more financially stable moving forward. When you have more control over your money, you can make smarter choices—and real peace of mind sets in.

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