How Not to Spend Your Tax Refund

The average refund amount for the 2016 filing season is $2,798. This may seem like free money from the Treasury Department, but this amount represents the excess taxes you paid the previous year.

How you use your tax refund really depends on your financial situation and your immediate needs. However, there may also be a temptation to spend your extra money on non-essential items. Bankrate shares how you should not spend your tax refund in 2016:

Don’t think of it as “free money”

It’s tempting to view your tax refund as an unexpected influx of cash — like a bonus at work or a small lotto win that’s not devoted to any particular goal like your paycheck would be. Your monthly income is devoted to bill payment, saving for unexpected expenses, and entertainment, if there’s enough leftover.

The “free money” attitude can contribute to not thinking through the best use for it. In fact, it’s a good way to blow it, says Bill Hammer Jr., a CFP professional and author of The 7 Secrets of Extraordinary Investors

“Don’t treat it like a $20 bill you found in your jacket and think about silly ways to spend it right away,” Hammer says.

He suggests using it first to pay down credit card debt. “This gives you an instant 15% to 20% return on your money,” he says.
If you don’t have credit card debt, start an emergency fund of savings for unexpected expenses or add money to your individual retirement account, or IRA.

Don’t book an expensive vacation

“Tax season can be stressful, and if it’s been a cold winter and you’ve been cooped up indoors, it can be tempting to spend your refund on something fun, on a distraction from your daily life,” says Dan Fisher, a financial adviser with Fisher Financial Group LLC.

“Don’t use your entire refund check or go on a pricey vacation. Remember, there are plenty of ways to save on a vacation,” Fisher says.

Bankrate advises charting out your travel spending and staying within a budget. The point is to plan ahead rather than go on an impulsive vacation the weekend following the arrival of your refund check.

Maybe you shouldn’t spend your refund on a vacation at all. In addition to paying down credit cards — a move that also will help improve your credit score — you could start a 529 college savings plan or add to one you already have.

“Then, claim that contribution as a deduction on your state return next year, if you are fortunate enough to live in one of the 31 states and the District of Columbia that offer upfront tax breaks for contributions to a 529 plan,” Apex’s Davis says.

Don’t buy things you don’t need

It’s funny how a little cash in your pocket makes you realize how much you absolutely need the latest (fill in the blank).

“If you didn’t need it before the refund, you probably don’t need it now,” Fisher says. “If you wouldn’t have paid for the much-needed item out of your paycheck, don’t use your refund for it either.”

Gary Swim, a retirement planner and owner of Swim Retirement, says an exception might be to use your refund for a tool or appliance that would encourage you to eat at home or help you in some other way.

“Some examples would be an espresso machine to cut down on trips to Starbucks or a deep freezer to store more meals,” Swim says. “You could also upgrade your grill.”

Another non-frivolous buy might be a portable generator. An ice storm or hurricane can be costly at best, devastating at worst. “This type of investment could really pay off,” Swim says.

If you do plan to pay off debt, Swim suggests that you create a debt worksheet to organize your credit card balances and use that refund to start paying them off.