You submit your 2011 tax return and eagerly await the refund coming your way, contemplating all the possible ways to use the money. But don’t get too excited—while receiving a large tax refund may seem like a monetary windfall and bonus to your finances, it’s actually not a great idea from a planning point of view, says Delo Advisors owner Sherry Delo. “Just think about who has the money for an entire year—the federal government. It has no opportunity to increase in value during that time and is not a great way to save money.”

Reconfiguring your W-4 form with your employer to establish the appropriate allowances can help create a more balanced tax return. “The more allowances, the less tax withheld, and the fewer allowances, the more tax withheld,” explains Michael Tsiaklides, managing member of Tealbrook Financial.

While recalculating your withholdings may eliminate a big tax refund next year, what do you do with the money this year? The first thing to address is any highinterest credit card debt, Tsiaklides recommends. “You could be paying up to 24 percent interest on a credit card balance, so why wouldn’t you pay that down or eliminate it?”

If you are debt-free, the next step is to examine your emergency fund, Delo suggests. “I ask my clients, How much money do you like to have in the bank at all times in order to be able to sleep at night? If you don’t have that figure, that’s where your refund should go—stash the cash somewhere accessible like a savings account.”

After achieving a cash-comfort level, you may consider putting refund money into a 529 college savings plan if you have children or grandchildren, Delo says.

Once all of those options are addressed, you then can take a look at your personal investments. “You want to review your longterm objectives and make sure that any investment would fit into your overall financial game plan,” notes James Moore, managing director of investments at Wells Fargo Advisors.

Those objectives will dictate your investment portfolio. While a blend of 60 percent equities and 40 percent bonds is typical for an average investor, Moore says, the diversification will vary depending on whether you are looking for growth or income. “Younger investors have more time for the market to grow and they can absorb the ups and downs of the stock market,” he explains. “An older investor wants more income and a less volatile portfolio.”

If you choose to invest in equities, Delo recommends buying blue chip dividend-paying stocks or mutual funds, which can provide growth while keeping your assets liquid. “You can either take the income from the dividend or reinvest it. There’s the potential for the asset that you’ve bought to go up in value and continue to get bigger,” she says.

Another refund investment option is U.S. Savings Bonds, which “do not pay a lot of interest, but you can keep them for your children in the future,” Tsiaklides says. “It’s another form of savings, and you get relief from state and local taxes.”

Whether you’re receiving $2,000 or $20,000 in a tax refund, careful consideration should be taken before spending that money on a luxury vacation or expensive toy. “In this economy, with the uncertainty of employment and fluctuating incomes, you shouldn’t spend a refund in a frivolous way,” Tsiaklides says. “Make a smart investment, or if you want to purchase something, buy something you really need and make good use of that refund.”