7 Really Dumb Things NOT to Do With Your Tax Refund
Tax season is in full swing. As some people prepare to write the federal government a fat check, others will eagerly await the arrival of a refund check.
According to the IRS, the average tax refund is close to $3,000. A GOBankingRates survey of Americans getting a refund check this year found that many plan to use their money to build up savings or pay off debt, while others will put money toward a vacation or other splurge. (Although, of course, there's also a strong argument that if you're getting a big refund, you're doing something wrong.)
It's your money, so you can do whatever you want with it, but remember that not every purchase is a wise one. Following are seven things you shouldn't do with a refund check. Learn them so you can make sure to do something wise with your tax refund.
1. Deposit Your Tax Refund Into a Low-Interest Account
Depositing your tax refund into savings can grow your emergency fund. But seek as high of a return as possible, while still keeping the money safe.
Compare savings accounts, and you'll find that interest rates are as low as 0.01 percent annual percentage yield. Such a return is pennies in comparison to what you can earn with a good high-yield savings account.
If you prefer to keep your tax refund in a checking account, the same rule applies: Rather than deposit funds in a regular checking account that doesn't earn a penny of interest, compare rates and open a checking account that pays interest.
If you plan to use your tax refund for other purposes — such as saving for retirement — consider moving beyond a checking or savings account and looking at investments like stocks and bonds, which can give you even bigger returns, albeit with higher levels of risk.
If you get a tax refund of $2,800 annually, investing this money at 6 percent compound interest each year will yield about $250,727 over 30 years, said Mike Zaino, president and CEO of TZG Financial, an insurance and financial services brokerage firm in Charlotte, N.C.
"That's an extra quarter-million dollars in your retirement account just for being disciplined and not blowing your refund on things that provide instant gratification," he said.
2. Spend Your Tax Refund on Unnecessary Purchases
You might view a tax refund as an excuse to go on a shopping spree and buy clothes, electronics or shoes. But that is a mistake, said Stephanie Genkin, a certified financial planner in Brooklyn, N.Y. "One of the worst things someone can do with a tax refund is use it for a vacation or blow it on clothing or a new gizmo when he or she is sitting on a mound of credit card debt," she said.
You can have fun with your money, but be reasonable and responsible. If you're having money problems and need to improve your financial health, put the money to good use.
Kerri Moriarty is head of company development at Cinch Financial, a Boston-based technology startup that provides fiduciary guidance. She said a tax refund can help boost cash reserves or can help you pay down credit card or student loan debt.
Although a shopping spree or vacation is enjoyable, "you're going to pay for it — pun intended — later when you're still financially stressed and forced to make other trade-offs throughout the year," she said.
3. Lend Your Tax Refund to Others
If you are generous and hate to see others in need, you might lean toward helping relatives or friends financially. While your heart is in a good place, think twice before handing over your cash. Most importantly, consider whether you're in a financial position to be someone's private lender.
Ultimately, it's your decision. Just remember it's not your responsibility to solve another person's financial messiness regardless of how much money you have in the bank.
"Make it a policy to say no to friends and family asking for money," said Nahum Daniels, a Stamford, Conn.-based certified financial planner. "It may sound strict, but lending money can cause problems in the relationship and can put you in a tough spot financially."
The tax refund you receive is nobody's business but your own. If you don't talk about your refund, you'll reduce the likelihood of encountering freeloaders.
Of course, turning down a request for a personal loan is easier said than done. If you decide to lend money, make sure you understand the downside of lending to family and friends. Give only what you can afford to lose, and put the loan terms in writing.
4. Receive Your Tax Refund on a Gift Card
Refunds arrive in several different forms. Some people wait for a check to arrive in the mail, whereas others put their tax refund on a gift card. For example, if you use H&R Block tax software and put some of your refund toward an Amazon gift card purchase, you'll receive a 10 percent bonus from H&R Block.
Although this is simple and convenient, it can be a mistake, especially if you lose the card. For a safer option that doesn't restrict how you spend the money, request to have your tax refund direct deposited into your bank account or get your refund the old-fashioned way: through the mail.
5. Take Your Refund to a Casino
With extra cash in your pocket, you might tell yourself it's OK to head to a casino to try and double or triple your money. But if you hope to make money off your tax refund, a casino is one of the worst places to turn a profit. Jayson Mullin, owner of Top Tax Defenders in Houston, said that, although this short-term fun can be tempting, spending your tax refund on a trip to a casino isn't the smartest move.
"Gambling away your tax return may yield results, but more often than not you will lose every penny," Mullin said.
6. Use It to Buy a Swimming Pool
Summer is right around the corner, so you might be tempted to use that refund to install a swimming pool in the backyard. But do so, and you might get more than you bargained for.
"A swimming pool can cause you to add more liability coverage to your insurance and (it) may lower your property value. Not only that, you have to figure in the cost of ongoing maintenance," said Mullin. "A smarter way to spend your return is fixing or upgrading things that increase your home's value."
Additionally, consider refinancing your property and getting a lower mortgage rate. Your tax refund can go toward paying the closing costs.
7. 'Invest' It in a Depreciating Asset
With an extra $2,000 to $3,000 in your pocket, it might seem practical to use the cash as a down payment on a car or boat. But that's not smart, said Timothy Wiedman, a retired associate professor of management and human resources at Doane University in Crete, Neb.
"One of the dumbest ways to blow an income tax refund is to spend it on a depreciating asset that requires a good deal of maintenance and general upkeep," he said.
Before spending cash on a car or boat, consider the entire financial picture. Take into account the cost of insurance and personal property taxes. And if you're thinking about a boat, don't forget the cost of a trailer, storage and licensing.
Wiedman offers this suggestion if you enjoy spending time on a boat during the summer: "Rent a boat at a nearby marina whenever a yen for waterskiing comes a-calling, and invest that tax refund in a good mutual fund."
A tax refund might feel like "free money." But the truth is, it is repayment of an interest-free loan you made to Uncle Sam throughout the previous year. This is money you've earned, so put it to good use.
This story originally appeared on GoBankingRates.