Don’t Blow Your Tax Refund!
The personal finance niche of the World Wide Web is ablaze with learned guidance on the most responsible and sensible use of a tax refund. I think most of us know what we should do with our refund: pay down high-interest debt, stash it in a Roth IRA, top up the emergency fund, or maybe replace the car’s bald tires at last.
But how many of us, giddy with feelings of ‘found money,’ instead spend our refund as if it were some else’s cash? C’mon, confess: you think of a tax refund as an annual gift from the government, right?
Tax Refund: Like Winning a Small Lottery?
When it comes to tax refunds, the temptation to just blow it is huge. As I mentioned, it’s found money after all, right? Well, no. But it feels that way. For many Americans, receiving a hefty tax refund is the closest they will ever get to that I-just-won-the-lottery feeling. Our first, maybe subconscious, thought: “Free money! My pass to do that financially stupid thing I’ve been wanting to do for the past year!”
How Not to Waste Your Tax Refund
I don’t expect anyone, including myself, to be 100% responsible with a tax refund. But how about if we all shoot for avoiding totally wasting it?
With that in mind, here is my list of 10 Ways to Waste Your Tax Refund. Avoid these, if you can:
- Invest your refund in an actively managed mutual fund If you missed it, you must watch the short clip from the March 12, 2015 Nightly Business Report in my article “Active Fund Management’s Record”. Actively managed fund fees are a waste of good money folks and a nest egg killer!
- Buy a boat You know the adage: a boat owner’s two favorite days are the day she bought the boat and the day she sold it.
- Replace the countertops with granite Sorry, but you’ve missed the granite train. Formica is back. Really.
- Give your refund to your kids Is your retirement security locked up? If not, unless you have inked an agreement with your kids for senior years financial support, stop being so generous, and let your kids fend for themselves!
- Buy “credit repair” First, credit repair is a rip-off. Second, it’s easy to remove inaccurate, unfavourable items from your credit report—you can do it yourself! Third, truly optimizing your credit score takes time and savvy. Read the Money Counselor Simple Guide “Raise Your Credit Score the Right Way” to become an expert.
- Make a down payment on a new car Question: what’s the fastest way to get underwater on a car loan (meaning your car is worth less than the loan balance)? Answer: Finance a new car. The first day after you drive off the dealer’s lot, deeply inhaling ‘new car smell,’ your car will be worth maybe $2,000 less than you paid—assuming you got a good price!
- Make a bet on Duke to win the 2016 NCAA men’s basketball championship I’m not a Blue Devils fan. 🙂
- Eat out more Restaurant food is expensive and lethal, my friends! You’ll spend more now, and you’ll spend more later on doctor and drug bills. Invest in a good set of cookware, a vegetable garden, and maybe a grill instead.
- Buy a single-cup coffee maker that devours those little plastic non-recyclable pods Do you like the idea of making different varieties of coffee by the cup? Then read this.
- Buy an Apple Watch Why not just have “Hipster Doofus” tattooed on your forehead and be done with it?
If you got a really big tax refund, now’s a great time to update the W-4 form you filed with your employer so less tax is withheld from your pay. While you’re in the payroll office, ask about setting up an automatic payroll deduction so the money you were lending interest-free to Uncle Sam will instead be funneled straight into your own dedicated savings account. Sweet!