Put your tax refund to work

If you're among the millions of Americans expecting an income tax refund this year, you've probably already filed your 2011 return and are eagerly awaiting the money. But if you haven't already mentally spent your refund on a guilty pleasure, here are several great ways to better put that money to work for you:

Pay down debt. Beefing up credit card and loan payments can significantly lower your long-term interest payments. Suppose you currently pay $120 a month toward a $3,000 credit card balance at 18 percent interest. At that pace it'll take 32 months and $788 in interest to pay off, assuming no new purchases. By doubling your payment to $240 you'll shave off 18 months and $441 in interest.

Start an emergency fund. To protect your family against the impact of a layoff or other unexpected financial crisis (e.g., medical emergency, major car repair, theft), set aside enough cash to cover six to nine months of living expenses. Seed the account with part of your refund and then set up automatic deductions from your paycheck or checking account.

Boost retirement savings. Beef up your 2012 IRA or 401(k) contribution, especially if your employer offers matching contributions; a 50 percent match corresponds to a 50 percent guaranteed rate of return – something you won't likely find in any investment.

Spend now to save later. Reap long-term savings on things you'll eventually pay for anyway:

• Replace older appliances with energy-efficient models that will pay for themselves through lower utility bills. For example, replacing a 1980s refrigerator with an Energy Star model will save over $100 a year. The Energy Star website (www.energystar.gov) can help you find Energy Star products and estimate savings.
• Switching from traditional light bulbs to energy-efficient alternatives like CFLs and LEDs, while initially more expensive, can save about $6 per bulb in annual energy costs. Just make sure they are Energy Star-qualified models, which exceed minimum standards.
• Schedule routine car maintenance. According to AAA, simply changing your car's air filter once a year can save over $270, while replacing older spark plugs can save $540 in wasted fuel.
• Ask whether your utility offers free or subsidized home energy audits. An audit will reveal which investments – such as increasing home insulation and replacing drafty windows and doors – will lower both winter and summer energy bills.

Finance education. Strengthen your career prospects and earnings potential by adding new skills through college courses or vocational training. Ask if your employer will help pay for job-related education. You can also set money aside for your children's or grandchildren's education by contributing to a 529 Qualified State Tuition Plan or Coverdell Education Savings Account. Bonus: Your contributions will grow tax-free until withdrawn.

Prepay bills. If you expect major expenses later this year (e.g., insurance premiums, orthodontia, college tuition), start setting money aside now so you won't rack up interest charges later. Also, paying slightly more each month toward your mortgage principal can save thousands of dollars in interest over the life of the loan.

And finally, if you regularly receive large tax refunds, you're probably having too much tax withheld from your paycheck – you're essentially giving the government an interest-free loan. Ask your employer for a new W-4 form and recalculate your withholding allowance.