The 8 Worst Ways to Spend Your Tax Refund and What to Do Instead
With tax season well underway, many of us are daydreaming about how we’re going to spend our tax refund. Americans can be placed in one of two categories: the spenders and the savers. But with only 34% of Americans planning to save their refunds, it begs the question: What about the remaining 66%? Are they planning on wasting it at the casino or disappearing on a long vacation? Hopefully not.
A tax refund might feel like free money, but it’s really just money you’ve already earned. Like Donna Summer says, we work hard for the money. So, let’s put it to good use. Let’s be smarter consumers rather than wasteful and spontaneous.
If you need a little guidance down this new path, we’ve gathered the eight absolute worst ways to spend your tax refund and brainstormed eight better plans for it instead. Let’s take a closer look.
Don’t: Try to get a bigger refund
“I’m going to withhold extra money from my paycheck every month, so I get more back during tax season.” Does that sound like something you’ve said? Withholding larger amounts might seem like a good idea at the time. Who doesn’t want to feel like a rock star with money to burn every April? But that would be unwise. A survey found 29% of us plan to spend our return on necessities, such as food or utility bills. But think about it: We are handing the federal government extra pieces of our paycheck interest-free all year, only to get back the exact same amount we gave them later. Nothing more. Then, we spend it on basic, boring things.
Let’s do something better.
Do: Aim for a smaller refund
Yes, you read that correctly. Instead of scratching the government’s back, let’s start scratching our own. Try adjusting your paycheck by taking back what you’ve been voluntarily giving to Uncle Sam. Then, put that extra cash back into your 401(k) or other high-interest accounts. If you’re able to keep that habit for 30 years in an account with 6% interest, you’ll be looking at an additional six figures in savings to enjoy during retirement.
Don’t: Deposit your tax refund in a low-interest account
Speaking of interest, most “smart” people will deposit their tax refund into a standard checking or savings account. But it’s likely that account has an extremely low interest rate, compounding only pennies on the dollar every year. Not cool. Earning only pennies is boring and doesn’t seem any better than wasting on something special.
So switch it up.
Do: Switch it to a high-yield account
We should all receive some kind of reward for choosing to file away instead of wasting a refund check, right? That reward is better known as an interest rate. Shop around for a high-yield savings account that makes being disciplined worthwhile. For example, compound interest on a $3,000 tax refund will grow your money exponentially over the years — and that’s worth something far better than instant gratification.
Don’t: Play the lottery
We’ve been playing the lottery for so long, some of us have convinced ourselves that we’re next for that Powerball payout. However, the odds are not in your favor, so using your extra cash to double down on lotto tickets will only leave you hurting. The same goes for the blackjack table. You might approach the table with an extra pep in your step with money to burn, but chances are you’ll end up owing money by midnight.
Let’s be cautious with our money instead. Unfortunately, not many people will do the tip mentioned next.
Do: Pay down existing debt
Even as the amount of debt we carry continues to rise, only about 27% of people plan to use their refund to pay down debt. But ridding yourself of a student loan bill or credit card payment is a gift that keeps on giving. While others are drowning in unforgiving interest rates with debt that grows like a weed, you could be contributing at a much higher rate — and freeing that money for something else spectacular.
Don’t: Splurge on unnecessary items
This is especially true for those with credit card debt or student loans. Americans have an average of over $66,000 in debt from these two things alone. But hey, keep buying shoes, new phones, that designer handbag, or those sweet new rims for your hot rod. You’ll surely enjoy cruising on shiny wheels for a few months, but trying to make ends meet come Christmas time won’t be worth it. By all means have fun with your money, but be responsible. For instance, you can wait to buy the 60-inch smart TV until Black Friday.
Instead, focus your purchases elsewhere.
Do: Buy something you need
This could be an overdue dentist checkup or a reliable car that’s not spewing hot oil down the interstate. Maybe you’re a part of the lucky 20% of the population that doesn’t have existing debt. In that case, we salute you. Continue being fiscally responsible, and conduct small-scale splurges that won’t drain your entire refund. A nice steak dinner at a fancy restaurant will satisfy any overwhelming urgency to spend.
Don’t: Splurge on a massive vacation
That all-inclusive tropical family adventure? Now is not the time. By the time you secure four flight tickets, a sexy new swim suit, and pay for all those extra off-the-resort excursions, you’ll be well over your tax refund amount and in a financial hole. Extra money in our pockets does something dangerous: Our eyes grow wide and our brains become less rational. So if you’re jonesing for a getaway, try a weekend trip outside of town. And save the big vacations for when you score that next big raise.
But we do want you to invest in yourself. That’s up next.
Do: Splurge on yourself
Anything that helps you grow as a person is a guaranteed return on your investment. Consider learning a new skill, going to a personal development seminar, or hiring a personal trainer. Either of these options increase your workplace value and help you stay motivated to succeed. If you really want to double down on returns, use your tax refund to fund a new side hustle that’ll generate even more income throughout the year.
Don’t: Receive tax-refunds on a gift card
In its continued pursuit of world domination, Amazon partnered with H&R Block for a tax refund bonus offer. Here, you have the option of using your refund to purchase Amazon gift cards and receive an extra 10% back just for using H&R Block’s preparation software. But don’t take the bait.
If you’re still feeling like this might be a smart way to spend your tax refund, let’s explain why it’s not.
Do: Receive tax refunds the old-fashioned way
There’s a reason most prefer to have their refunds directly deposited or sent via mail. It’s safer. And Amazon is a dangerous trap. We start out browsing for groceries and end up with a Chia Pet for the office. Remember most items on Amazon can be categorized as aforementioned “unnecessary” buys. Avoid wasting your money on anything that sabotages your efforts to save for retirement.
Don’t: Use it to fund worthless home repairs
All winter you dreamed of having a pool to enjoy during the warm summer months. So it’s only natural to consider using your tax refund to fund this expansion. But swimming pools add little value to your home. Other popular home repairs, such as adding a sun room or converting a bedroom to an art studio, are costly and do nothing to increase your home’s resale value, too.
Do: Invest in your home
The better option would be to invest in your home by searching for better mortgage rates or refinancing. Worthwhile home repairs can add extra value to your home without breaking the bank. For example, energy-saving improvements are tax deductible. It also helps to remember that renovations don’t always mean complete gut-jobs. Repairs can be as simple as installing new bathroom title or a shiny new stove in the kitchen.
Don’t: Hide it under the mattress
Also, don’t hide money in a coffee can, for that matter. Cashing your tax return, and stuffing it under the mattress might seem like the safest bet against economic failure or the grid shutting down. But if that never actually happens, you won’t have anything to show for the money you’ve set aside. In 10 years, you’ll still have the same $3,000 you started with — less when considering how much $3,000 is really worth after 10 years of inflation.
Do: Start a college fund for your children
An average college savings fund for public, in-state tuition tops $24,610. Use your tax refund to start building a 529 plan. A prepaid tuition plan allows you to lock in tuition rates at certain universities and qualifies you for certain tax exemptions. Plant that money seed today, and let it grow for 18 years. If you’re looking for a bit more risk, try buying stocks. The stock market can be shaky, no doubt. But high risk equals high reward.
Follow Lauren on Twitter @la_hamer.