People are getting their tax refunds at this time of year, and are ready to spend them. A lot of people, however, don’t spend them wisely. Suddenly you have a chunk of money right there, ready to be spent. It’s easy to use that unwisely. These are some of the tax refund spending mistakes many people make, along with some suggestions for smarter choices.
These situations aren’t true for all families, of course. Something that’s a mistake for one is just fine for another. But all too often, there’s a smarter choice available. The tighter your finances are for the rest of the year, the more careful you should be when spending your tax refund.
Major Tax Refund Spending Mistakes
Most times, it’s a mistake to spend your tax refund on these things. Not always, of course, but if you want to do this, make sure you know why you’re spending your money this way and be sure there isn’t something smarter you should spend your tax refund on.
That New TV
Getting a new TV, smartphone, or whatever gadget you’ve been eyeing is often a tax refund spending mistake. Sure, they’re nice to have, but how much do you really need it? Why couldn’t you afford it before?
If you’re spending your tax refund on something like a TV, think about why you’re spending it that way. If it’s just “I have the money now” and not “That’s how the timing worked, and the old one is about dead,” you may need to rethink things. You’re smartest to buy such things when they really need to be replaced, not just because a chunk of money came in.
If you couldn’t afford it without the tax refund, is it really affordable with it? Maybe there’s a better way to spend your money.
It’s easy to want to splurge when you get extra money in your account. I get that. But it’s not a good idea to spend your entire refund on stuff that won’t last.
Whether it’s a new wardrobe or a nice vacation, really think about why you’re spending your refund that way. Be sure your priorities are straight. There are good reasons to spend your refund on things like vacations (you can’t beat the memories!), but not all reasons are good.
The Wrong Down Payment
There are times when it’s the right move to spend your tax refund as a down payment on something, such as a new or newer car. Other times it’s a huge mistake.
Don’t use your tax refund as a down payment on something you will struggle to make the monthly payments on. Just because you have enough money for the down payment doesn’t mean you can afford the thing the rest of the year. Keep it sensible so that you don’t add to your money troubles after the tax money is gone.
Some people can’t resist gambling when they have some extra money. It’s that dream of hitting it big, and you have a system, right?
Casinos look as amazing as they do because people lose a lot of money there. Odds are that you’ll be one of them.
If you really want to gamble, only use a small part of the money for that. Don’t risk your entire tax refund. If you have a good day gambling, you have some extra money. If the odds aren’t in your favor, you’ve only lost that part of the money, and still have the rest to spend more carefully.
What Should I Spend My Tax Refund On?
The right choice for what to spend your tax refund on depends on your situation. If any of these apply to you, however, they’re probably a good choice.
If you’re getting a huge refund every year, odds are that you should adjust your withholdings. Remember, this is money you put in. If you change your withholding, you’ll have a little more money each month, rather than having it sit around until you file your taxes. You can put that money to better use if you get it as a part of your regular paycheck.
Credit Card Debt
Credit card debt is expensive. If you get a big tax refund, spend it paying down that credit card debt. It’s so hard to get out from under it that the boost should help you quite a bit. Getting rid of credit card debt is usually a wonderful idea. Considering how high credit card interest can be, there are few things that can beat paying it off for financial benefits.
Are there any repairs around the house that you’ve been delaying on because of money? Spending your tax refund getting your house into better shape is probably a good idea.
You might look into better insulation for your home, new windows, a new roof, new carpeting or flooring, or planning a remodel of your bathroom, just for some starter ideas. Depending on the size of your tax refund, it may not pay for the entire amount, but if you can afford to make these changes with your tax refund money, this is a great time for it.
You may even be able to consider getting solar power if there are good deals on it in your area and your electric bill is high enough for it to be worthwhile. In my area, solar companies try to get the monthly cost to less than what you’re paying for electricity, so this could be a good deal regardless of the size of your tax refund.
Start An Emergency Fund
How prepared are you financially for an emergency? Do you have a few months’ income saved up? If not, spend your tax refund by starting an emergency fund for your family.
This is money you try hard not to touch, even though it’s fairly accessible. Keep it separate from your regular spending money, at least in terms of how you track things. This way you don’t have to touch the credit cards if you need a major car repair, a pet gives you a huge vet bill, you need a new refrigerator, and so forth. An emergency fund will cut down on the stress of these events.
Try for a high yield savings account for your emergency fund if you can. This should keep it accessible for emergencies, but still let it earn a bit of interest.
How does your retirement portfolio look? Have you been good about contributing to a Roth IRA or other retirement account?
If you have room to contribute, this is a wonderful use of your tax refund that will pay itself back when you retire. Most people don’t have enough money saved up for retirement. You can give yourself a boost by adding an appropriate amount of money into your retirement account. This is especially important for stay at home moms and dads who often struggle to contribute to a retirement account.
If you can’t contribute more to a retirement account, how about a regular investment account? It won’t have the tax advantages of an IRA, but it’s still a good way to make your money work for you.
A Sensible Vacation
Taking a vacation can make a lot of sense, even though they can be expensive. You can’t beat some of the experiences you can have while on vacation.
You need to keep it sensible, however. Don’t take a vacation that is far beyond your means. The money you spend on vacation, even if it comes entirely out of your tax refund, should make sense in light of your overall financial situation.
Improve Your Career Or Business
Have you been waiting for the money to improve your business or career? This is a great thing to spend your tax refund on because it should pay you back.
What would you like to learn that would help you to earn more money? Now is the time to take action and do it. You could learn to be a virtual assistant and start a whole new business from home, for example. You could learn a skill that would make it easier for your employer to promote you.
Whatever you choose, be sure that it’s a wise choice. Don’t fall for a scam.