By Luke Stenis for InvestingAnswers.com
According to the IRS, the average American received a $2,913 tax refund last year.
Tax refunds give you a great opportunity to improve your life and well-being, as well as your financial future. You worked hard for your money, so while it may sound nice to spend it on something that will be temporarily satisfying, you should consider making these 21 wise money moves instead:
Use your tax refund and invest in a dividend reinvestment plan (DRIP). The best thing about DRIPs is that they take advantage of the awesome power of compounding. Compounding is simply the process of earning dividends on reinvested dividends. Compounding is often described as “magic” because it is one of the easiest ways to build wealth and takes only a tiny amount of effort.
2. Seed a Growing Business or Start Up Company
Ever dreamed of starting your own restaurant, company or store? Follow your passion or invest in a friend by seeding a startup or growing business.
3. Pay Off Debt
While it is tempting to spend your tax refund on a summer vacation, paying off your debt can be just as satisfying. After all, when you pay off your credit cards, you’re essentially making a 13-20% return on your investment, depending on what APR you’re paying. That kind of performance would be hard for even the most sophisticated investor to beat!
4. Start a College Fund for Your Kids
Investing in your children’s education can be one of the most fulfilling experiences you can have as a parent. Put your tax refund into a 529 college savings plan or an Education Savings Account (ESA) and help out your kids in the future.
5. Grow Your Own Garden
Building a garden and growing your own food helps you develop a green thumb, and it also saves you money each year at the grocery store.
6. Save for Retirement
An old rule of thumb says that in order to retire comfortably, you will need to have enough savings to generate 80% of your pre-retirement income. So it is never too early to start saving for retirement, and there is no better time to tuck money away in your individual retirement account (IRA) you get your tax refund.
7. Pay Down Your Mortgage
Send your tax refund to your mortgage lender to make an additional payment on your mortgage. It will be worth it when you pay off your home sooner than planned.
8. Donate to Charity
Give back to a worthwhile charity that you are passionate about. Send financial help to relief organizations that are helping with recent large-scale disasters in Japan, Haiti and Africa. By donating your refund to charity, you also get a break on next year’s taxes.
9. Refinance Your Mortgage
Refinancing your mortgage can result in substantial monthly savings, but you usually need to bring some money to the bargaining table in order to get the lower rate you want. Your tax refund could be the perfect bargaining chip to make the deal.
10. Get a Gym Membership
Most gyms offer great deals for new members ready to opt in for at least one year. Do your wallet and your waistline a favor and find a gym that fits your workout style and has a reasonable refund/cancellation policy.
11. Invest in Your Own Value
Take a class at your local college or university, or enroll in a certification course. You could learn about cooking, self-defense or even investing in real estate. By investing in yourself, you can increase the market value of your own time and worth.
12. Renovate Your Home to Be More Energy Efficient
Projects that improve your home’s long-term efficiency are well-worth the investment. Solar panels, new roofs and better insulation is just a start to saving thousands each year on energy bills. Plus, these improvements can extend the lifespan of your home.
With interest rates remaining at historic lows, now could be the time to invest in real estate. Perhaps you can find your dream home, a rental property or just an upgrade to a better space for your family.
14. Adopt a Pet
Owning a dog or cat can improve your mood, reduce stress, control blood pressure, give social support, encourage exercise, stave off loneliness and provide unconditional love. If you like animals, there is no better time to adopt a furry friend.
15. Get Some Life Insurance
If you have children or own a home, the common rule of thumb is that you should have enough life insurance to cover 8-10 times your annual income. But because life insurance is very situation-specific, take a bit of time to educate yourself on how much life insurance is right for you.
16. Upgrade Your Computer
Computers are considered more than “gadgets” to family households. They are used for homework, research, communication, entertainment and storage for important data and files. A desktop or laptop that can keep up with you is an important part of running an efficient household.
17. Improve Your Own Health
Is there an operation, doctor’s visit or procedure you or someone you love has been putting off? Braces for the kids, dentures for grandma or sleep apnea for yourself? Tax refunds provide the perfect opportunity to take care of some important and overdue health expenses.
18. Start an Emergency or “Rainy Day” Fund
Experts recommend having 3 to 6 months of living expenses tucked away for emergency situations. Consider opening up a high-yield savings account for your tax refund and save it for emergency financial situations that may (or may not) arise in the future.
19. Take a Vacation or Start a “Sunny Day” Fund
Everyone needs a vacation. If it makes financial sense for you to invest your tax return in a “sunny day fund”, then dump your refund into an account set up for that purpose. Studies show that we value memories much more than we value stuff — but remember that running up debt to take that vacation is not a good idea.
20. Begin a “Car Replacement” Fund
Everyone’s car will eventually die, get wrecked or be “handed down” to a family member. And if you have teenagers or growing kids, it never hurts to start saving for a replacement vehicle sooner rather than later.
21. Create a Will
Planning for your death is by no means fun, but it is important. Leaving children behind with no legal guardian is any parent’s nightmare. If you have kids and don’t have a will, it should be your next financial priority.
The Investing Answer: Use your 2011 tax refund wisely in any of these 21 ways and the outcome can improve your life, well-being and financial future.