9 Ways You Shouldn't Spend Your Tax Refund
And What to Do With the Money Instead
When you get a large tax refund, it can be tempting to splurge on something big and fun, like a Caribbean vacation. But a large tax refund is actually a great chance to improve your current financial situation. Here are nine ways you shouldn't spend your tax refund—and what to do with that money instead.
Don’t Spend It on Material Things
When you have a large sum of money coming in, it can be tempting and splurge on a television, gaming system, or new shoes that you have been lusting after. But these items aren't a good investment. Here's why: They don't have a lasting positive financial impact. Putting it simply: You would be blowing a lot of money on material items that won't improve your financial situation and will depreciate over time.
Don’t Hit Up the Casino
You may be tempted to take your tax return to your local casino. Since it's money that you didn't expect to have, it can be easy to justify gambling with it for the chance to win even more money.
From a financial standpoint, this is a terrible idea because gambling has no guaranteed rate of return. In fact, the odds are very heavily stacked against you. You'd be better off putting that money in the stock market. It'll still give you the thrill of the unknown, but with a more predictable rate of return.
Don’t Just Put It in Your Checking Account
If you just put the refund money in your checking account, you may slowly spend it without even realizing it. Suddenly it becomes easier to justify the extra meal out or the quick shopping trip because the money is available in your account.
It's better to set that money aside and then earmark it for a specific purpose. If you're not sure what to do with the money yet, then put it in your savings account so it's available when you do decide to spend it. Plus, you can earn interest on money sitting in a savings account.
Don’t Spend It All on Your Kids
It may be tempting to hand out a large amount of money to each of your children. While it's fine to spend some money on them, buying everyone a new iPhone or taking them on a huge shopping spree will not help you reach your goals. It can also set expectations too high for your children, and they may begin to expect more money from you. If you really want to spend the money on your children, then consider setting up a 529 College Savings Account for them instead.
Don’t Use It as a Down Payment on a Car You Can’t Afford
It can be tempting to use your refund as a larger-than-usual down payment to help you purchase a car that you normally wouldn't be able to afford. If you need a car, look for one that you can afford to pay off in three years and one that you're able to afford without using your tax refund. You can even try to pay for a car in cash and use the refund as the beginning of your savings for a new car.
Don’t Borrow Against It
If you go to a tax preparation store or business, they may offer you a refund anticipation loan or a rapid refund option. These loans usually have extremely high-interest rates and application fees.
When you file your taxes, you have the option to file electronically and have the money directly deposited in your account. Often, the amount of time it will take to get your refund is not that much longer than it would take to get one of these loans —and you end up losing money just to get your money a little faster. Plus, if your refund is lower than expected, you will be stuck paying back that money with interest.
Don’t Continue the Debt Cycle
It's a great idea to pay off your credit cards with your tax refund, but it won't help you if you then run up your credit card balances again in the following months. To help prevent that, put some of your refund away for an emergency fund before you pay off your debt.
Don't Book an Expensive Vacation
Planning a getaway with your tax refund isn't the worst idea, but you don't have to choose the most expensive option or spend your entire refund (and likely more). There are plenty of ways to save on travel and to avoid common and costly travel mistakes. Planning ahead instead of taking off last minute is one way to save money on a vacation.
Don't Buy Unneeded Items
When you get a large tax refund, you may be tempted to splurge and get yourself something nice that you wouldn't normally buy before the refund—something that you don't really need, but crave. It's wiser to spend money on items that you truly need or that will help you save money in the long run is a much better idea. Buying a coffee or espresso maker to replace your daily trip to the coffee shop, or buying a bike to ride instead of paying for public transportation or car services, is an example of this.
Treating yourself is not totally out of the question, but try to limit this to around 5 to 10 percent of your refund.
What to Do With Your Refund
When you get your tax refund, you need to make a plan for that money. This means that you may put some toward your debt or to build up your emergency fund or toward your child's college education.
If you just put it in the bank, without a purpose, you will be surprised at how quickly that money can disappear. Take the time before you get your refund and determine the best way to spend it. Determine if you need to catch up on your bills or if you have a specific goal, like saving for a down payment.
Determine how you want to spend it and then shop around for the best price on the item you'd like to purchase. This will make the most of the money on whatever you decide to do with it.
Take the Time to Adjust Your Withholdings
If you're getting a huge refund each year, then it may be time to adjust your tax allowances. The IRS has a withholding calculator that you can use to determine the amount you should claim on your taxes. Check with your state to see if it has a similar calculator that you can use.
If you adjust your withholdings, then you may have more money throughout the year to reach your other financial goals, such as buying a home or paying for your child's education.