7 Ways You Shouldn't Spend Your Tax Refund

Couple paying with credit card in clothing store
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When you get a large tax refund, it can be tempting to go out and spend it all at once. It is easy to spend it all at once on something big and fun. If you have a significant tax return, you may be tempted to live it up and do something that you normally would not be able to do. However, this is a chance to improve your current financial situation. Here are seven things you should not do with your refund and a few smart suggestions on what to do with it.

Don’t Spend Your Refund on a New Television

When you have money coming in, and it is a large amount, it can be tempting and splurge to get the television, gaming system or new shoes that you have secretly been wanting all year. These items do not have a lasting positive financial impact. In essence, it means that you are blowing a lot of money on just one item, when you could be using the money to help improve your overall quality of life.

Don’t Go Gambling With It

It can be easy to go gambling when your tax return gets in. It is money that you did not expect to have, and so it is easy to justify gambling with it so that you can get more money in return. Most people do not make back the amount they spend while gambling. It is basically throwing your money away. It is better to leave the money alone.

Don’t Just Put It in Your Checking Account

If you just put the money in your checking account, you may decide to spend it on something only to realize you have already spent it.

When it is in your checking account, it is easy to justify the extra meal out or the quick shopping trip because the money is available in your account. If you are not sure what to do with the money yet, put it in your savings account so it is available when you do decide to spend it.

Don’t Spend It All on Your Kids

When you have kids, it may be tempting to hand out a large amount to each of your children so that they can go shopping or you may decide to splurge on the toy they have always wanted.

While it is fine to spend some money on them, buying everyone a new phone or giving them a huge shopping spree will not help you reach your goals. It can also set up expectations with your children and they may begin to expect more. It is important to be responsible and limit the amount you spend on them to fit your current financial situation.

Don’t Use It as a Down Payment on a Car You Can’t Afford

It can be tempting to use your refund to help you purchase a car or a boat. Often it makes a great down payment for these things. However, if you are struggling to make ends each month, it does not help to sign up for additional monthly payments. It may also help you qualify for a car which you really cannot afford. If you need a car, look for one that you can afford to pay off in three years. 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. This is a loan with an extremely high interest rate. You will have to pay an application fee. With the option to file electronically and to 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 approved for rapid refund.

It also saves you from owing money if your refund is different than expected.

Don’t Continue the Debt Cycle

It is great to pay off your credit cards with your tax refund, but it will not help you if you then run up your credit card balances again in the following months. Be sure that you put some away for an emergency fund, before you pay off your credits. Then when you pay off your cards, stop using them. Do not carry your cards with you when you go shopping or do other things. This will help you stay out of credit card debt. Adjusting your withholdings so you do not get a huge refund each year will also help.

Do Give It a Purpose

When you get your tax refund, you need to make a plan to spend it. This means that you may put some toward your debt or to build up your emergency fund. 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, you want to reach.

Do Splurge a Little

It is okay to splurge and get yourself something nice. Generally, try to limit this to around 10 percent of your refund if you are still trying to get out of debt or 20 percent if you are out of debt and working on other goals. Determine how you want to spend it and then shop around for the best price on how you want to spend it. This will make the most of the money on whatever you decide to do with it. If you are getting a $3,000 refund, then you will have about $300 which is enough for a new moderately sized television or a weekend trip to somewhere nearby. There is a lot to do with the money.

Take the Time to Adjust Your Withholdings

If you are getting a huge refund each year, you should 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 to see if your state has a similar calculator that you can use. Your goal should be to receive around $100 back. This way you will have more money during the month to help you reach your financial goals more quickly. It is important to adjust the amount you have withheld throughout the year as your situation changes if you start making more money, buy a home or have a child.