This is a guest post from Jennifer Rose Hale.
You filed your taxes 12 days ago, and the “ding!” from your computer is an e-mail alert from your bank. You’ve got money! Sure enough, it’s your tax refund. If you got one, you’re not alone: the most recent figures from the Internal Revenue Service show that over 111 million individuals received refunds in 2010, with the average amount close to $3, 000.
Your refund, whether it’s close to the average or just big bucks in your life, is calling to you to spend, spend, spend. So, to borrow from Dennis Hopper in “Speed, ” what are you gonna do?
Let’s look at some common ways you could blow that money, and some alternatives to increase your savings rates — and improve your life — instead.
Big vacation… Or a better job?
If things are going rough at work, it’s tempting to use your refund on a getaway, to buy yourself a week (or even two) to forget your projects, your boss… Heck, even the name of your company, if you do it right.
In the long run, though, a bad job situation will just boomerang back to you as soon as your plane’s wheels touch down again at home. Maybe it’s time to pick up some online training or buy a copy of “48 Days to the Work You Love” or “What Color Is Your Parachute?” Aim yourself in a better direction with a small purchase, and put the remaining savings to work for you in your retirement fund — that big getaway at the end of your career.
Eventually, you’ll get the chance to say goodbye to your boss altogether, but you might as well enjoy your job while you get there.
New wardrobe… Or a new you?
You’ve been waiting for those hundreds — maybe thousands — of dollars to refresh your wardrobe, and you’re planning a big run at Macy’s (if you expect hundreds) or Anthropologie (more likely thousands) to get a whole new look.
Instead of a new wardrobe, focus on a happier, healthier you. Join the Y and pick up a cookbook with healthy recipes. The money you save cooking at home could be tucked into a high interest savings account, and a fully-stocked emergency fund will lower your stress levels.
HDTV… Or high-def relationships?
Electronics are often at the top of the shopping list when the refund comes. Staying at home with a movie on a widescreen HDTV — with 3D, even — is a big temptation. But as weeks and months pass, you may find yourself seeing your friends less and less, and your couch more and more.
Spend a few dollars on a bottle of wine and some ingredients for dinner, and invite your friends or family over for a game night. You can take the savings and put it toward a down payment on a home loan with good mortgage rates, for a more comfortable setting to host your parties in the future.
If your friends complain about the size of your TV screen, tell them you’ll happily accept an early housewarming present.
Car down payment… Or a payment-free future?
That $500, $1, 000 or $3, 000 may seem like the perfect amount to put down on a new car purchase or lease. It may feel pretty tired to schlep around town in the hatchback that took you through college and beyond, and it seems like everyone you know has a hybrid — or at least something without French fries mashed into the rug.
That lease or six-year loan, however, will cost you a fortune in interest or balloon payments — and you’re signing up for a big bill for years into the future. Instead, shop around for online savings accounts, CDs or money market accounts with high interest rates. These FDIC-insured accounts are low-risk enough to hold your money’s value for the near future and will build enough interest to sweeten the deal. Add to it steadily, and within a couple of years you may have enough to buy a respectable used car outright.
The ground-in French fries? They add character.
Fritter it away… Or build new habits?
The easiest way to spend your refund is to just… Spend it. Dinners out, a game console, a new set of wine glasses, movie tickets and season passes. Before you know it, your hundreds or thousands are all gone, the party’s over, and you have nothing much to show for it.
Instead, you could look at this as an opportunity for a great new habit: paying yourself first. Follow the core advice from personal-finance tomes such as “The Wealthy Barber” and start investing for your future — not just for retirement, but for all the wonderful wants and needs you’ll have 10, 20 or 30 years down the line. With this new habit, and a little patience, all the rest of your wants can be achieved — comfortable home, fun toys, cool cars — and a life with a little less stress.
So that “ding!” from your e-mail alert could be the path to short-term spending… Or long-term contentment.
4 Responses to “Five Ways to Blow Your Tax Refund”
I’m paying off wedding debt. I hate paying credit card interest.
I’ll pay in about $700 on tax day. I finally adjusted my withholding last year so next year I should be fairly close to even. I knew back in December that there was going to be a chunk to pay out so I am prepared for the cost.
I did recently receive an insurance settlement for some wind damage to my house and garage. Most of the claim will be used for repairs, but some of it I am fixing myself so that there will be excess funds. I am splitting the excess in a few directions. About half will be left in savings and used to pay off a credit card intro offer in July. About 300 more will be used to make home upgrades not related to the wind damage, and the remainder will bolster my E-fund.
I was tempted to build a computer with it but I resisted.
My approximately $1200 refund was used as follows:
1/3 to pay off debt
1/3 to savings
1/3 to use as I pleased
I’ve been working on paying off old charged off debt, and that $400 allowed me to close one of them out three months early.
A tax refund is still money that you paid income taxes on.
The best tax-refund is one you never get. Getting a large tax-refund (which is the refund of overpayment of taxes), and not maxing out tax-deferred savings (like 401ks and traditional IRAs) is evidence of missed opportunity.
Increase your tax-deferred savings rates, and strive to have close to a $0 refund/bill as possible — your take-home pay wont even notice it.