(MONEY Magazine) – Right about now, you're probably feeling some lingering pain from that most dreaded April rite: completing your tax return. Well, cheer up. Although you probably poured a quarter or more of your hard-earned money into government reservoirs last year, the Internal Revenue Service will likely return a few drops to you. A whopping 68% of filers, in fact, receive a refund check. Last year's average: $1,244.

Your first impulse may be to blow this found money on fancy designer duds or a big-screen TV. But deep down you know that you face serious demands for your cash, from saving for retirement to paring debt. So consider this refund a chance to do the right thing.

We asked a dozen financial planners and budgeting experts for their recommendations on how to invest a sizable tax refund of, say, $1,000 or more. Of course, without fail their first response was, "Why is the taxpayer getting back so much?" Good question. A refund check may seem like a bonus. "But all you've really done is provide your Uncle Sam with an interest-free loan," says Earle Kelley, a financial planner in Tuscaloosa, Ala. The consensus of our financial experts: If you are getting back more than $300, you need to sit down with your employer's payroll officer and adjust your withholding. For example, a single filer making $40,000 a year will take home an extra $780 by increasing the exemptions on a W-4 from one to two.

That's good advice for your '97 return. Still, what about that money you've got coming from '96? Here are some smart ideas:

--Start an emergency fund. Even if you've heard it before, it bears repeating. No matter what your financial situation is, you need an adequate emergency fund. "There's no way to predict when you might have a medical emergency or lose a job," says Margie Mullen, a financial planner in Los Angeles, "so you must have enough cash saved to cover at least three months of expenses."

Now, it's doubtful your refund will be quite so big. But use the cash to seed the account anyway. "After this start," says Mullen, "add to the pot each month until you have enough." (Tip: Use the extra cash you get from adjusting your withholding.) For safety and easy access, Mullen suggests you keep this stockpile in a money-market mutual fund, where your cash can earn an average of 4.9% today. A current top yielder: Aetna Money Market (minimum investment: $1,000; current yield: 5.3%; 800-367-7732). For more places to park your cash, see the story on page 114.

--Pay down your debts. If you already have an emergency fund, this is the next place to invest your refund. The reason: Saving and investing without paying off your debts is like trying to walk up a long down escalator. Interest payments on what you owe could drain away what your investments earn. Say you decide to invest $1,000 of your refund in a stock mutual fund rather than pay a $1,000 credit-card debt. If the fund returns 12.6% this year--the 10-year average annual return for U.S. diversified equity funds to Feb. 1--you'll have a pretax gain of $126. Not bad, you think, until you figure that you've paid $170 in nondeductible credit-card interest (if your card carries the typical 17% rate) on that $1,000 unpaid balance, $44 more than your theoretical stock gain.

Don't rush to pay off any debt for which Uncle Sam lets you deduct interest payments, such as mortgages and home-equity loans. That tax advantage makes those debts cheaper than they look. For example, if you're in the 28% tax bracket (taxable income of $41,200 to $99,600 for couples filing jointly; $24,650 to $59,750 for singles), your interest deductions could lower your effective interest rate by 2.8 percentage points.

--Fund your retirement. Once your debts are under control, put your tax refund toward your most important long-term goal: retirement. If your company offers a tax-sheltered retirement savings plan such as a 401(k) or 403(b), increase your 1997 contributions by the amount of the refund. If you are not participating already, arrange to have a percentage of your income roughly equal to your refund deposited in an account during the year. If you adjust your withholding, you'll hardly miss the money. Alternatively, use this year's refund to open a 1997 Individual Retirement Account (IRA) at your bank, brokerage or fund company. Your investment will grow tax-free until you withdraw money after age 59 1/2 and, subject to certain restrictions, you may be able to deduct your deposit on your '97 tax return.

You can fully deduct a $2,000 IRA contribution from your income if you or your spouse does not have a company pension plan, or if your adjusted gross income doesn't top $40,000 (for singles, that cap is $25,000). Starting this year, a husband and wife can each contribute $2,000 to IRAs, even if one does not work; the previous total for one-earner couples was $2,250.

Most people don't open an IRA until the end of the year or when they prepare their taxes. But as long as you know you qualify for the deduction, put your money to work earlier by using the tax refund to open an IRA now. If you don't qualify for a write-off, consider funding a nondeductible IRA. What you earn on your retirement stash will still grow tax-free. To lessen paperwork hassles when you tap your account, experts recommend keeping deductible and nondeductible IRAs in separate accounts.

--Buy the fund or stock you've always dreamed of owning. If all that's stopped you from buying stocks or mutual funds is an inability to scrape together enough money, a tax refund may be your savior. For some great picks to start building a diversified fund portfolio, see the story on page A1. Or consider two no-load funds suggested by Fullerton, Calif. financial planner Carl Camp. Both require initial investments of just $1,000. He favors Neuberger & Berman Guardian (five-year average annual return to Feb. 1: 17.8%; 800-877-9700), a $5.6 billion large-cap value fund that has whipped 87% of growth and income funds in the past five years while taking on 20% less risk. For a small-stock alternative, he recommends $621 million Third Avenue Value (18.7%; 800-443-1021), whose five-year average annual return places it in the top 7% of all growth funds.

On the other hand, you might consider investing in one of the more than 200 companies that sell their shares directly to the public via an 800 number. To buy 100 shares, for example, most firms with direct-purchase plans charge a transaction fee of $5 to $10, plus 3[cents] to 12[cents] a share. In contrast, you'd pay $36 to $50 at a typical discount broker and as much as $90 or so at a full-service firm to buy 100 shares. The stock is held in an account at the company, and dividends can be reinvested automatically at no charge. Here, according to Wall Street analysts, are two top direct sellers to buy now. (Both stocks trade on the New York Stock Exchange and are listed in order of their projected 12-month returns.)

Wal-Mart (ticker symbol: WMT; recent price: $23.75; 0.9% yield; 800-438-6278). With nearly 3,000 Wal-Mart locations worldwide, the discount store market is nearly saturated. So the $105 billion Bentonville, Ark. firm is opening supercenters, which allocate about a third of their floor space to grocery items as well as clothing and household goods. Analysts expect Wal-Mart to add at least 100 supercenters, where per-store sales are about 2.5 times higher than at the traditional Wal-Mart, to the current 343 locations in 1997. A.G. Edwards analyst Don Spindel sees profits growing 13% over the next 12 months, sending the stock to $32 for a 36% total return.

Home Depot (HD; $50.75; 0.5%; 800-730-4001). If you've ever tried to find a space in one of Home Depot's gigantic, packed parking lots, you shouldn't be surprised to learn that this store leads all rivals in total sales and profitability. The $19 billion Atlanta-based retailer has expanded from 60 to 512 stores in 10 years and plans to add 100 more in 1997, from Vancouver to Miami. Prudential analyst Wayne Hood expects earnings to climb at least 20% annually in the next three to five years as the firm adds stores and increases existing stores' sales 5%, lifting the shares to $62 in 12 months for a 23% total return.

--Okay, indulge yourself. Finally, if you're that rare breed who has managed to keep your debts under control and your savings on track, congratulations. Reward yourself by spending your tax refund on something extravagant, such as a brief cruise. A seven-day sail on the Norwegian Star cruise ship to the western Caribbean in September (305-436-0866) costs $699. Just make sure you head to your payroll office to adjust your withholding the minute you get back on land.