5 Ways To Waste Your Tax Refund
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Did you know that the average tax refund is around $3,000? That's a nice chunk of change, right? However, it's a dilemma every year for many people. Should you invest it? Should you enjoy it? Should you save it? Should I pay down debt? What should you do? And no one ever wants to make the wrong decision.
While there are so many ways you could spend the money, I want to share with you five ways you shouldn’t spend the money.
Spend it all on an insignificant purchase
You worked hard for that money. Consider using it for something that will get you closer to reaching your money goals.
Think about it like this, if you invest that tax refund, it can have a significant effect on your retirement. This is a great time to put the entire amount into an IRA. That $3,000 put into an IRA every year is worth over $180,000 after 20 years at a 10% return.
Or you could save it. Do you have 3 -6 months stashed away for your emergency fund? If not, that would be a great place to start. Put it away in a High Yield Savings Account, so you’ll get more money back just for having the money sit there in case you need it.
If you’re struggling on whether or not to spend it, consider this, you may not care about whatever you’re planning to buy as much as you think you are. Think of all the things you've purchased over the last 5 years that got you really excited at the time. Would you rather still have those things or would you rather have all that money back?
If you prefer to spend it, spend it on something you'll remember forever. Putting it in your bank account and spending a little here and there isn't likely to result in something meaningful.
For example, if you've never seen the ocean, take a vacation. With the year we’ve had in 2020, and the year we’re still having, we could all use a vacation. If you've always wanted to see Europe, maybe now is the time to go. Buy that Rosetta Stone so you can finally learn that language.
Here’s another thing you can do, create a tax break for the following year. If you have to go shopping, consider increasing the value of your refund by buying something that will pay you back. For example, maybe solar panels for the house are in order. By doing this, you'll get a tax break next year, help support the environment, and increase the value of your home. BAM! A three-fer!
Ignore the possibility of paying down your debt
While you might not be able to guarantee that you'll make 10% on the money you invest, you can guarantee that you'll make 15%, or more, on any money you use to pay off debt that has a 15% interest rate or higher. And that 15% is both tax-free and 100% risk free.
I know many times people do not like to put huge chunks of money towards debt unless it’s paying it off in full, but think about how much closer this will get you to your ultimate goal of being debt free. Think about the satisfaction you’ll feel when you see that balance drop. Even if you don’t pay it off in full, there are still advantages to putting a huge amount towards it. Pay your debts.
Create more debt
This is one of the worst things you can do, but yet it happens every single year where millions of Americans buy something they cannot afford just because they can afford the minimum payments. Okay, I know I just snatched your edges off a bit, but I’m saying it because I love you.
Try to avoid spending your refund as a down payment on a major purchase that will only bring you more debt, like a new car. Like I said, this happens every year. Someone wants a new car so they purchase one, an expensive one because they have enough for the large down payment, but then realize they can’t afford it after all. Or maybe you don’t purchase an expensive car, you purchase a cheap car because you’ve been trying to watch your spending, but then the car is a lemon. You end up paying so much in repairs than the amount it actually cost to purchase the thing or you choose not to fix it and end up at square one.
Moral of the story is, don’t create more financial challenges for yourself later on.
Forget about self improvement
While this topic might be far from your mind when you receive your tax return, self improvement could be your ticket to the life you’ve always dreamed of.
Consider taking a class, hiring a mentor, or even a money coach.
Maybe you could use a computer to start your business.
Perhaps you need some equipment to start that Youtube Channel.
It’s all about investing in yourself. If you don’t do it, who will.
Use the money to fuel an unsustainable lifestyle
If you're desperate for your refund so you can get caught up on your bills, that's a sign that you’re currently spending more than you make on a lifestyle you can’t afford. But you don’t need me to tell you that. What you do need is a way out so you won’t have to spend next year’s refund on bills. All you need to do is get your financial life under control. Create a budget, even while you’re broke. I wrote an entire eBook on it. Check it out:
A tax refund is a great opportunity to strengthen your financial life. In the future, when you look back on your choice, spending the money on something meaningless or something that creates more debt usually makes you feel as if you wasted it. Consider your options carefully so you can make a decision that gives you pleasure later on as well as right now.
