What to do with your tax refund

Tax time: That interesting time of year when normally smart people start making really dumb financial decisions. Isn’t it amazing what a little extra cash, otherwise known as a tax refund, can do?

Random online polls suggest that 61% of American taxpayers expect that this year they will receive some sort of refund on their returns. While there are plenty of ways to spend money, I thought today would be a good day to review my top five stupid ways to spend a tax refund.

ACT LIKE IT’S FREE MONEY

The key word in the term “tax refund” is “refund”! Common synonyms for refund are “refund”, “refund” and “overpayment refund”. Tax refunds are not free money. The government doesn’t give you a bonus every year just to thank you for being so awesome.

It’s money that you’ve allowed them to borrow from you all year. And now, unlike most of your friends or family members, they give you your money back.


It doesn’t matter that you made the loan interest free even if you pay them back with interest from your student loans or credit card accounts. Do you really have enough money to lend to anyone, let alone the government, under these conditions?

Smart solution: If you regularly receive a large tax refund, change your withholding (use this calculator to determine how much you should withhold and instructions on how to change it). Your goal is not to owe or be owed at the end of the year. If you can come within $100 of that goal, you’re golden.

PAY OFF THE DEBT

Before you do this – as noble as it may be – you need an emergency fund. If you’re unable to fund your own future emergencies, you’ll never get out of debt because you’ll keep running to credit cards for a bailout.

Smart Measure: Continue to make your regular repayments and use the repayment to build your emergency fund. Then keep adding to it until you reach your goal (enough to live at least three months without pay, or $10,000). You will then be in a great position to pay off your debt quickly and have confidence that you will carry on when life comes.

MAKE A DEPOSIT

Make a down payment on a car, TV, furniture, or anything else that will turn into new monthly payments, also known as debt.

The burning sensation and feeling of prosperity and wealth inspires people to invest in a new car, a boat, a Disney vacation or whatever. Here’s the thing to remember: After that down payment, you’re still responsible for those pesky monthly payments that last much longer.

Even if you feel good right now, remember that a tax refund only comes once a year. The joy of recovering your overpaid taxes can quickly turn into a nightmare if you’re not careful.

Smart move: Assuming you’re prepared for emergencies, use the refund to clear your bills, not create new ones. Never create ongoing debt with one-time funds.

TREAT YOURSELF TO A LITTLE RETAIL THERAPY

There’s no doubt that buying new clothes, shoes, electronics, or other cool stuff is a great antidepressant, but that’s stupid. Once that buyer’s euphoria wears off, you’ll be right back where you were – broke but with more stuff.

Smart Travel: Take a brisk walk, spend time with your kids, friends and family doing things that won’t cost you money. Most cities have a large free museum or zoo one day a month. Or go on a picnic; take a bike ride; Explore your own city by searching Google for your city name as well as “Free Attractions” to find all sorts of things to do for free. You will be amazed. And you’ll feel much better too.

CRAM IT UNDER THE MATTRESS

It’s an idea, but not a very good one. Money under the mattress earns no interest and is vulnerable to theft and fire. But above all, he is vulnerable to you in a moment of weakness.

Smart Move: Open an online savings account at SmartyPig.com or Ally.com. Deposit your tax refund, then sit back and know it’s safe from you while growing up at the same time.

If you lose your job or have a real financial emergency, you’ll be very glad you were smart with this year’s tax refund.

About Cheapskate Everyday

Mary invites you to visit her at EverydayCheapskate.com, where this column is archived with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, “Ask Mary”. Tips can be submitted at tips.everydaycheapskate.com/. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog, and the author of the book “Debt-Proof Living”.