4 dumb ways to spend your tax refund
By Dawn Papandrea
April 2, 2015
It’s easy to make less-than-intelligent spending decisions (for which you’ll end up kicking yourself later) when a big fat check from Uncle Sam hits your bank account in the form of a tax refund.
That’s why you should come up with a system for dealing with unexpected windfalls of cash, says Kyle Taylor, editor of the personal finance blog ThePennyHoarder.com. “My formula is 50 percent goes to existing debt, 25 percent to savings and 25 percent for fun,” he says.
He uses that small reward model for any extra cash influx, from tax refunds to getting a raise to receiving a rebate in the mail. “If you’re constantly punishing yourself with your budget, you’re not going to stick with it very long,” he says.
For Leslie Tayne, an attorney specializing in debt relief and author of “Life & Debt: A Fresh Approach to Achieving Financial Wellness,” she suggests pausing before you spend will help you avoid actions you’ll regret later.
“Don’t use up all of a refund to buy something at the expense of other things you might need the money for.”
— Leslie Tayne,
attorney and author
“Just stop and think about what your priorities are. What is it that you need and want? Take a look at your list, and see where the money would make the most sense,” she says.
To help you do just that, we’ve compiled a list of the most common ways to blow your tax refund, along with some suggestions on how to use it more wisely:
1. An “I deserve nice things” shopping spree
If you’re living paycheck to paycheck all year long, it’s hard to argue that a shopping spree wouldn’t feel wonderful. However, hitting the mall is gratifying only in the short term, says Taylor.
On the other hand, there’s nothing wrong with buying yourself a gift, says Tayne. “Treating yourself can actually help you get though the monotony of your daily finances,” she says. Her only caveat? “Don’t use up all of a refund to buy something at the expense of other things you might need the money for,” she says, “or if you don’t have any savings in the bank.”
2. Upgrading something in your life (when you can’t afford the subsequent bills)
Before you make a splurge purchase, consider if there is an ongoing cost that will stretch your budget. The perfect example? Buying a timeshare. “It seems like such a great deal, and you’ll have it forever if you just pay this amount of money. But then you’ll also have fees and maintenance,” says Tayne.
The same idea applies to upgrading to a new car when your current one is perfectly fine. Sure, a hefty down payment using your tax refund helps offset the cost, but what about the higher monthly payment and insurance premiums that will follow you for the next few years?
“If you can honestly tell yourself that an upgrade-type purchase will have a real long-term payoff, then it’s something to do,” says Taylor. For instance, you might buy an energy-efficiency appliance in your home if your current one is on its last leg.
“If you’re constantly punishing yourself with your budget, you’re not going to stick with it very long.”
— Kyle Taylor, editor,
Another example, says Taylor, is investing in some sort of professional development, such as taking a class or learning a skill that could help give your income a boost.
3. Taking a gamble
You probably know that betting your entire refund on black 21 is dumb (at least, we hope!). But there are other gambles that people attempt that can be equally risky.
Tayne says investing in a rental property is a good example. “Unless you’re prepared to pay those expenses on your own, there is a risk associated if you can’t find a renter,” she says.
Along those lines, taking a chance on a stock tip could result in a quick loss.
If you’re hoping to grow your refund into something bigger, however, go ahead and invest — just do so wisely, says Taylor. His advice: Open or contribute to a Roth IRA.
4. Getting away — in luxury style!
Although experiences and memories do have lasting value, they also tend to cost more than you initially plan for.
“Vacations and parties tend to get more out of control than a finite purchase,” says Tayne. Your initial budget can be thrown out the window and you’ll end up creating debt on credit cards if you adopt the ‘you only live once’ mindset. Before you know it, you’re upgrading your hotel room, switching to a first-class plane ticket, and charging way more to your room than you should.
Of course, there’s no reason why you can’t use a portion of your refund to do something fun with family and friends, but it doesn’t have to be super expensive, says Taylor. “Find out what’s within a car ride that you haven’t checked out yet and plan a small road trip. If you go with other people, you can even split the cost of gas and hotels,” he suggests.
Ultimately, how you spend your tax refund is your business. If you struggle with debt or don’t have an emergency fund in place, focusing on those aspects of your finances first — and leaving a little room for fun — will serve you better in the long run.
Says Tayne: “Don’t haphazardly spend the entire refund. Look at what’s going on with your budget in the short and long term, and think about the impact that that money could have.”