7 Ways You Shouldn't Spend Your Tax Refund
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. Read on for 7 things you shouldn't spend your tax refund on – 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 to get the television, gaming system or new shoes that you have secretly been lusting after.
But these items are not a good investment. Here's why: they do not have a lasting positive financial impact. Putting it simply, you would be blowing a lot of money on a material item that won't improve your financial situation and will depreciate over time. It's not a good investment.
Don’t Hit Up the Casino
If you're someone that enjoys the thrill of gambling, you may be tempted to take your tax return to your local casino. Since it's money that you did not expect to have, it can be easy to justify gambling with it, if even for the possibility of the chance to win even more money.
From a financial standpoint, this is a terrible idea. 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's still 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 money in your checking account, you may slowly spend that money without even realizing 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.
It's better to set that money aside then earmark it for a specific purpose. 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. Plus, you won't be earning any interest on the money if it's just sitting in your checking account.
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 iPhone or taking them a huge shopping spree will not help you reach your goals. It can also set too high of expectations for your children and they may begin to expect more. If you really want to spend the money on your children, 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 to help you purchase a car that you normally wouldn't be able to afford. However, having a larger-than-normal down payment may cause you to spring for a car you actually can't afford.
If you need a car, look for one that you can afford to pay off in three years and one that you are 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. This is a loan with an extremely high interest rate, and you will also 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, which makes a refund anticipation loan a poor idea.
Plus, what if your refund is lower than expected? Then you will be stuck paying back that money with interest.
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 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.
Do Splurge a Little
When you get a large tax refund, it's perfectly OK to splurge and get yourself something nice. Generally, try to limit this to around 5-10% of your refund.
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 are getting a huge refund each year, 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 to see if your state 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.
Updated by Rachel Morgan Cautero.