The average tax refund is around $3,000; that’s a nice chunk of change! However, it’s a dilemma every year for many folks. Should you invest it? Should you enjoy it?
While there are several good ideas on how to put that money to use, let’s look at several things that it’s best to avoid:
1. Spend it all on an insignificant purchase. You worked hard for that money. Consider using it for something that’s meaningful to you or increase its value with a wise purchase.
* 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.
o Consider 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.
o For example, if you’ve never seen the ocean, take off for the beach. If you’ve always wanted to see Europe, maybe now is the time to go. Buy a piano if your dream is to learn to play.
* 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: you’ll get a tax break next year, help support the environment, and increase the value of your home.
2. 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% on any money you use to pay off debt that has a 15% interest rate. And that 15% is both tax-free and 100% risk free. Pay your debts.
3. Create more debt. This is one of the worst things you can do. Try to avoid spending your refund as a down payment on a major purchase that will only bring you more debt, like a new boat. You’ll only create more financial challenges for yourself later on.
4. 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 or hiring a mentor.
* Maybe you could use a computer to start a business.
* Perhaps you need a new set of clothes to go out and find a great new job.
5. 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. Resolve that you’ll get your financial life under control so you don’t have to spend next year’s refund on your bills.
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.