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Top 5 ways to spend your tax refund

Waiting for a check from Uncle Sam? Here's how to use it wisely.
/ Source: TODAY

More than 73 million Americans have received money back from Uncle Sam after filing their 2007 federal income taxes — the average refund: $2,366. If you were one of the “lucky” ones, you shouldn’t look at your refund check as a windfall. It’s not free money, it’s your money. You were simply giving the government a tax-free loan all year. Now it’s time to make the most of those hard-earned dollars. Here are five ways to spend your tax refund:

Wipe away debt
1. Pay down credit card or high interest debt — whether it's a store card or overdraft on your checking account (which often comes with high fees). Start with your highest rate card or debt first and pay it off or as much as you can. For those who carry a balance on their cards, the average balance is much higher (perhaps three or more times as much) as the average refund.

Be a smart saver
2. Deposit your refund money in a money market account — your “what-if-the-unexpected-happens” emergency fund. Do not keep this reserve with the same bank that holds your checking account. If it’s in a different financial institution, you'll probably be less likely to dip into it for everyday spending or occasionally splurging.

You can focus on growing your savings so that you have at least three months worth of living expenses. If something unforeseen does happen, forcing you to withdraw some of this money, at least you won't have to rack up more credit card debt to pay for that emergency.

3. Contribute to a traditional or Roth IRA. The maximum amount that you can contribute in 2007 is $4,000 (or $5000 if you're 50 or over). The IRS now allows refunds to be direct-deposited into an IRA account. But if you were a last-minute filer, the refund would likely not have been counted toward your 2006 IRA contribution. It will be credited toward 2007.

Splurge sensibly
4. Shop around and look for deals at Best Buy or Circuit City for the best deal on that iPod or laptop you've had your eye on. If you must have that high-def plasma TV, go for it. But make sure you can pay for it in full now — don't pull out the plastic.

5. Treat yourself to a weekend getaway. You've paid your bills, you plan on saving a little more each month, so now it's time to splurge a little. Spend three or four days away from the daily grind — take a brief beach vacation or trip to the mountains — to relax and recharge. You deserve the reward.

CNBC correspondent Sharon Epperson is the author of “The Big Payoff: 8 Steps Couples Can Take To Make The Most Of Their Money — And Live Richly Ever After,” available May 8, 2007.