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Tax refund spend it quickly or use it prudently

More than 70 percent of taxpayers will receive tax refunds this year, with refunds averaging $2,860. If you're part of the fortunate majority, you may be wondering how to spend that extra cash. It's tempting to use it for a down payment on a new car or a Hawaiian vacation. Before that currency flows out of your bank account, consider the following less exciting alternatives that may put you in a better financial place.

  • Pay down debt. According to the Federal Reserve, the average annual interest rate on credit card debt has been hovering around 13 percent. If you carry a balance of $5,000 for a full year and the bank charges the average rate, you'll pay $650 in interest. Instead, why not use your refund to slash your credit card balance in half? You could save $325 this year and take one more step toward financial independence.

  • Pump up your emergency fund. Many American households carry thousands of dollars in credit card debt from month to month, and much of that debt stems from unexpected bills or reduced income. A well-funded emergency account can help you avoid high-interest debt when you're faced with life's inevitable struggles. Try to accumulate a balance covering three to six months' living expenses.

  • Fund a retirement account. Hoping to retire some day? Contribute your tax refund to an individual retirement account (IRA). Again this year, you can set aside a combined $5,500 in Traditional and Roth IRA accounts ($6,500 if you're age 50 or older). Consider this: If you contribute $5,500 every year from age 30 to age 65 and your account earns a relatively conservative 6% rate of return, your account balance when you retire at age 65 will total nearly $210,000.

  • Other ideas. Set up a 529 college savings plan for your toddler's college tuition, allowing the money to grow tax-free for college bills. Fund a reserve for end-of-year holiday gifts. Donate all or a portion of the refund to your favorite charity. Take a college course to improve your career options.

Ultimately, the decision to spend your refund on something fun and a little more frivolous or something prudent is completely your own.

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