Don't Waste This Tax Opportunity: 3 Smart Ways to Use Your Refund

It's hard to save, especially when times are tough. But when you get a tax refund check, you've essentially set up an IRS-sponsored savings plan. By overpaying your taxes a little bit every month, you build up a slush fund that you collect on every April.

So since you've already saved it, why not put it to use? Here are three ideas to consider.

1. Pay down your debt. Being in debt is a never-ending cycle of stress. Charges from high interest rates can make you feel as if you'll never pay off your creditors. But a big lump-sum payment toward that high-interest debt is the best investment you can ever make. By reducing or eliminating the amount of your monthly payments, you'll also free up more money all year round.

2. Start an emergency fund. Sure, it's nice to spend money on something you want. But if you're struggling to get by, saving it for times when you really need it could be the first move toward digging yourself out of your financial hole.

Think about it: When you need cash quick, you have limited options. Credit cards charge hefty interest rates. Payday loans rates are even higher, and their fees add up in a hurry. Actually having money set aside can save you a fortune -- freeing up even more money to help you make ends meet.

3. Open an IRA. Starting a retirement account may not be the most fun way to use a refund, but it can be one of the smartest. Not only do you help yourself with your financial future, but you may be able to turn your contribution into a bigger refund next year.

Traditional IRAs give you a tax deduction that you can use to offset income and pay less tax. In fact, if you act quickly, you can actually open an IRA to get another refund for this year -- although you'll have to file an amended return to claim it.

A tax refund is found money, but what you do with it can make a huge difference to your financial well-being.

Motley Fool contributor Dan Caplinger isn't getting a tax refund this year, alas. You can follow him on Twitter here.

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