What NOT to Do With Your Tax Refund
It’s tax season again and for many of us that means one thing and one thing only: it’s time for a refund! Yes, tax refunds can be a beautiful thing, especially when your check is for a sizable amount.
And while I’ve talked about the many ways you should spend your tax refund, there are still plenty of people out there who just can’t keep themselves from throwing away their windfall. So, in the spirit of the season, here are the 5 worst ways I’ve seen people squander their tax refund:
1. Going on a Massive Shopping Spree
Sure, we could all use a little retail therapy from time to time, but if shopping is more of a habit for you than a once-in-awhile treat, you should probably do your best to avoid the mall around tax time. If you’re the type who just can’t say no to a “deal” or has multiple retail credit cards, using your tax refund as an excuse to make a frivolous purchase is a terrible idea. Not only are you wasting away a good amount of money on unnecessary purchases, you may feel inclined to spend more than your refund, adding onto what may already be a sizable amount of credit card debt. Instead, why not take the money and pay off those pesky credit card balances.
2. Paying for an Upgrade You Don’t Really Need
Yes, that new iPhone is slimmer and shinier, but is it really necessary? Upgrading things based on what you want instead of what you need is sure way to make sure your refund will go to waste. Instead, look into ways you can use your refund to make upgrades that will save you money in the long run. Investing in some energy-smart appliances, exercise equipment, or funding a home-improvement project are all examples of smarter upgrades you can use your refund on.
3. Gambling it Away
Whether it’s on the ponies, at a casino, or just making a string of wagers with friends, gambling is one of the most irresponsible ways to spend your money. While it may be thrilling knowing there is a chance of hitting it big, gambling is a surefire way to quickly rid yourself of money. If you want to use your money to make more money, do it the smart way and put it into some sort of investment account. Sure, it might not be as exciting as the racetrack, but at least you’re minimizing the chance of losing it all.
4. Financing a Frivolous Purchase
Spending your refund on an unnecessary purchase is bad enough, but using it to finance an unnecessary purchase is even worse. Whether it’s a massive flat-screen TV or the latest model of a luxury car, taking your refund to finance an expensive item will only leave you with bad debt. Considering the drain the monthly payments will have on your wallet and the insane amount of interest you’ll have to pay off, financing things like these are rarely a good idea.
I’ve said it before and I’ll say it again: when it comes to your tax refund (or any sort of windfall for that matter), it’s always in your best interest to address your needs before your wants. Paying off debt, firming up an emergency fund, and starting your retirement savings are all examples of things that can, and should be, seen as financial needs. That said, it is ok to treat yourself, so as long as you divide up your refund thoughtfully, you should be able to address a big chunk of your needs while still having a little left over to satisfy a little want. You know your finances are in order when you’re able to enjoy the best of both worlds.