Don’t Squander Your Tax Refund

It’s that fateful time of year again when we either see how much of our money we get back from the government or we find how how much we still owe. Yes, tax time is upon us and if you haven’t completed your taxes by now, chances are you are scrambling through this final week to complete yours.

If you are fortunate enough to have a tax refund coming your way, you need to be mindful of how it is spent. While it’s tempting to go out and buy one of those fancy new TVs on sale at your local electronics store, that purchase may not serve you very well in the long run.

Avoid the Splurge

If you feel that money burning a hole in your pocket, you’re not alone; the temptation is strong for me, too. When we finished our basement, we installed all the wires and a built-in screen for a projector and sound system. But right now those wires and screen are unused because we don’t have the equipment. The $3,000 we got back could buy nearly all the electronics I need to make my dream home theater come to life.

While I would enjoy using our basement how we intended, it doesn’t make sense financially right now to buy some expensive electronic equipment that I’ll just be itching to replace again in three to five years.

Check Your Emergency Fund

There are many competing pieces of advice concerning emergency funds. What’s a right amount for one person may not be enough for another. I always shoot for saving enough money to cover three to six month’s worth of expenses. If you don’t have an emergency fund, please consider putting your refund in a high-yield savings account (I use ING Direct) and letting that cash infusion start you on the road toward better financial security.

Needs First; Wants Last

With the birth of our second child, our sole baby-safe vehicle is not enough. It’s time to replace my 14-year-old truck. It’s served me well, but the cost of maintaining the vehicle coupled with the fact that my children can’t ride in it has forced me to give it up.

Over the course of the next few months we’ll pick out a new vehicle and put down as much cash as we possibly can on it. The $3,000 from the tax refund plus the $1,000 we had in our snowflake account and the extra $300/month we’re saving from refinancing our mortgage should allow us to put together a hefty down payment and secure good financing.

Last year, we used our surprise tax refund to buy a new washing machine and this year we’ll use it to buy a new car. These are long-term investments in items that we need and will be using for years. Rather than buying a fancy new TV or gambling it all away, it helps you more to buy something that will be around for a long time and really get your money’s worth.

Time to Invest?

Nobody knows what the market will do tomorrow, next week, or next year, but I do know that the market is about half of what it was at its peak. In my mind, that presents a buying opportunity at a 50% discount. It’s like a fire sale on stocks.

That said, I would trend to not invest any money in the stock market if you need that money in the short term. But if you have a decade or longer before you would need access to that money, why not set up an IRA and stash that money away for retirement? That way you can use your tax refund to help reduce next year’s taxes and help your future self in retirement. Sounds like a win-win to me.

Just Don’t Waste It

Your tax refund is the result of an interest-free loan you made to the government by withholding too much from your paycheck. Getting a refund back feels like fun money, but it was always yours to start with. Just like you wouldn’t go out and randomly blow a thousand dollars from your paycheck, don’t feel tempted to do this with your refund, either. Regardless of how much you got back or what you do with it, just don’t waste it. Financial freedom starts with using your money wisely – even “found” money.

Do you have an interesting story about your tax refund and how you used it? If so, share it with us in the comments!

Photo credit: kozume