A tax refund can be ideal for paying off debt, building your saving account or replacing an aged home appliance. Unfortunately, it can fund less-worthwhile endeavors just as easily.
While there’s nothing necessarily wrong with having some fun with your tax refund, you’re almost sure to regret buying anything that offers few long-term benefits. After all, you may not see another lump sum like it for another 12 months – if then.
Here are five questionable ways to spend your tax refund, along with some alternatives designed to help you avoid mistakes.
No. 1 “I can see it in his eyes: That horse can’t lose!” (Use it to gamble)
What’s better than getting a sizable tax refund? Making that refund bigger by placing a winning bet on an underdog pony that seems to have an extra spring in its step on race day. But before you place that or any other wager, consider the depressing walk you’ll make back to your car if your hopes get ground beneath the hooves of 19 faster steeds.
The alternative: If you’re dead-set on risking some of your refund, investing in the stock market may at least offer a longer period of suspense. You might also consider a mutual fund if you’re able to stomach slightly less excitement.
No. 2 “It’s going to be like 1999 – only crazier!” (Throw a party)
Yes, a party of historic proportions may produce some great memories. But unless those memories are worth the cost of drinks, food and maybe some drywall replacement, it’s best to think twice. This is especially true if the memories of your last epic party are somewhat hazy.
The alternative: Throw a spring celebration, but opt for a potluck instead. If you know your friends may have received a refund as well, you may go as far as to institute a BYOB policy.
No. 3 “What if we went to the mall right now?!” (Fund a spontaneous shopping trip)
It may feel like fate when a flat-screen TV goes on sale on the same day you receive your refund. But it’s not. Flat-screen TVs are always on sale somewhere. While the initial buzz of a spur-of-the-moment purchase may be exhilarating, it may not be long before it’s replaced by another potent emotion: buyer’s remorse.
The alternative: Make a list of all of the things you’ve wished you could purchase outright during the last year, and carefully select something from it. You’re less likely to overlook other, more useful purchases this way. Even then, once you’ve reached a decision, it couldn’t hurt to sleep on it.
No. 4 “I got mine last year, but have you seen how skinny the new one is?” (Buy a hot new phone)
A phone on its own may not be an unwise purchase, but a new phone is often cheaper when you agree to extend your contract at the same time, and it may also require a more expensive data plan. Using your refund to heighten your financial obligations in the future is no way to get ahead.
The alternative: If your phone truly needs to be replaced, make sure that your new plan won’t overextend your monthly budget. If that’s not possible, consider giving your old phone a tune-up by transferring your old photos to your computer and deleting your rarely used apps. This won’t make your phone new, but it’s unlikely to wreck your finances either.
No. 5 “Put your drinks on my debit card – I just got my refund!” (Use it as a checking-account buffer)
Sure, all of the items above can result in your refund evaporating quickly. But most of them will still yield a decent story. Letting haphazard spending habits erode your refund as it sits in your checking account is a great way to end up with no money and no real tale to tell about how you spent it.
The alternative: If you suspect your refund may fall victim to checking-account overspending, have it direct-deposited into your savings account instead. While you’ll still need to exercise discipline to avoid spending it, it will at least enjoy a buffer from your debit card.
A final word on refunds
As pleasant as it is to receive a refund, adjusting your tax withholding status to prevent future refunds has its advantages. No, you may not get a lump sum each spring, but investing the extra money you get in your paycheck in a high-yield savings account or certificate of deposit allows your funds to earn interest throughout the year.
Although deposit yields remain at historic lows, shopping around can still result in a reasonable return. And if you’ve already abstained from throwing a legendary party and spending an afternoon at the horse races, you deserve every penny you’re entitled to.