Every year, millions of Americans receive a tax refund. This year, you may have been one of them. While in theory it’s best to prepay your taxes accurately with no anticipated refund—after all, a refund means you have overpaid your taxes during the year, effectively giving the federal government an interest-free loan—many enjoy receiving a refund, as it may feel like an unexpected windfall. While it may be tempting to spend that money as soon as it comes in, there are several things you should almost never spend your refund on.
In this first part of a two-part series, we’ll explore what you should NOT do with your tax refund. (Next time, we’ll cover what you should do instead.)
Splurge on a new toy. If your refund has you eyeing a new TV, boat, clothing, car, etc., remember that the satisfaction they bring in the short term won’t help your long-term financial situation. Items like this quickly depreciate in value, and you won’t earn additional money from them. Put another way, spending that money now means you can’t spend it (and any additional interest it could earn) in the future.
Gamble with it. While the potential to use the money to possibly win even more money may be tempting, remember that gambling has no guaranteed rate of return.
Let it sit in your checking account. If your refund just sits in your checking account, you may slowly spend it without even realizing it. If you aren’t sure yet what you want to do with your refund, at least keep it in your savings account, which likely earns better interest and is harder to spend frivolously from.
Continue accruing debt. While paying off debt with your tax refund can be a really good use of the money, it won’t help in the long term if the pattern of spending doesn’t change too. Paying off credit card debt needs to work hand in hand with reducing spending.
Book an expensive vacation. A year in quarantine has given many people cabin fever, so it makes sense if you want to spend your refund on a nice trip. However, if you do want to use it for travel, just make sure you’re conscious of how you spend the money in advance of and on the trip. If you plan far enough in advance, you can prevent many common travel spending mistakes, such as paying a premium for a last-minute flight.
In our next installment, we’ll explore what you should do with your tax refund instead.