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10 things not to do with your tax refund

It's not often that we get lump sums of cash, and the temptation is great to do the wrong thing. Here's a quick checklist.

By Stacy Johnson Mar 3, 2011 7:17PM
 This post comes from Stacy Johnson at partner site Money Talks News.

 

According to the Internal Revenue Service, the average American's refund for tax year 2010 is about $3,000, a slight increase over the previous year.

 

But whatever you're expecting, there are smart things you can do with it, as well as things that aren't so smart. Here are some dumb things, along with some advice on how to check on the progress of your refund if you've yet to receive it.

 

Start by watching the following short video that provides three dumb things to do with your money. Scope it out, then meet me on the other side for more.

 

 

Now that you've seen three dumb ideas for your refund, let's expand on those and increase the list to 10.

 

1. Spending it rather than investing it. Getting a lump sum of cash is a great time to consider investing, especially in a tax-advantaged vehicle like an IRA or other account that will allow your earnings to grow tax-deferred.

 

Saving might not be as much fun as shopping, but think about this: If you invest a $3,000 refund every year and earn 10% annually on it, in 20 years you'll end up with an extra $189,000. That means retiring three years earlier if you can live on $63,000 a year. Doesn't that sound like fun?

 

2. Not paying down debt. Every dollar you pay in interest makes your credit card company or other lender richer. Every dollar of debt you pay off makes you richer. While there's no guarantee that you can earn 10% if you invest your tax refund, here's a sure thing: If you're paying 15% interest on a credit card, paying it off is the same thing as earning 15%, tax-free and risk-free.

 

3. Not using it to generate a tax credit for next year. Can't stand the thought of not going shopping? Then buy something that will improve your home and generate a tax credit at the same time. Example? A solar water heater might set you back $3,000 to $5,000. But it will save you about 20% on your electric bill every month for years to come, and get you a tax credit next year equaling 30% of the cost. If you spend $4,000 on a solar water heater, next year's tax bill will be $1,200 lower.

 

To learn more about things that qualify for tax credits, see this page of the Energy Star website.

 

4. Failing to create a memory. Take $3,000, deposit it in your checking account, and then gradually use it in dribs and drabs. When it's over, what do you have? Nothing. If you're determined to blow your tax refund, at least buy a memory with it. Go whitewater rafting on the Snake River. Check out Vietnam. Do anything except letting your windfall slowly blow away.

 

5. Loaning it to someone. If you've been bragging about the giant check you've got coming, you've got only yourself to blame: Now your friends, relatives or kids are looking for a loan. Before it's too late, start telling everyone you made a math error, and rather than getting $3,000 back, you actually owe $3,000.

 

6. Not doing something to improve yourself. Maybe it's time to take that class that will prepare you for a better job, or get that computer or software that might help you make some money on the side. Even a new suit that might get you noticed at work. There's something you can do that will pay dividends. Now's the time to do it.

 

7. Using it to create more debt. Using your tax refund as a down payment on a car or other type of loan -- especially the kind used to purchase a depreciating asset -- should top the list of dumb things to do, especially if it's unnecessary. I'd rather you buy a used car, then go check out Machu Picchu.

 

8. Failing to prevent future big refunds. I know it feels good to get checks in the mail, but big tax refunds are really more defeat than victory. Money you get as a refund is money that you've lent interest-free to Uncle Sam all year. If you're consistently over-withholding, visit the IRS W-4 calculator and see if you should adjust your W-4 at work so you'll have less withheld from each paycheck throughout the year.

 

On the other hand, if you're more capable of doing something productive with an annual lump sum versus a slightly larger monthly income, don't change a thing.

 

9. Going to the mall. For some reason, when we get a check from Uncle Sam, some of us act like we won the lottery. This isn't "found money" -- it's your money. If you didn't need new clothes before you got your refund, you probably don't need any now.

 

10. Using it to sustain an unsustainable lifestyle. If you're one of the millions of Americans who pays a fee to get a refund anticipation loan because you need the money instantly, that's a sign you're in over your head. Do some reading on refund loans and resolve to never again pay a tax preparer to get your refund.

 

Then do what you can to reverse the dire financial situation that's making an instant refund necessary.

 

If all this sage advice has you champing at the bit, you can check on your refund by going to the "Where’s My Refund" page of the IRS website or by calling the IRS Refund Hotline at (800) 829–1954. If you mailed your return, wait at least three weeks before checking; if you filed electronically, allow 72 hours. If you use the automated telephone system, you'll need your Social Security number, filing status and the amount of the refund shown on your return.

 

More from Money Talks News and MSN Money:

VIDEO ON MSN MONEY

9Comments
Mar 9, 2011 9:49PM
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I always love the 10% (or more interest) examples. 

"If you invest a $3,000 refund every year and earn 10% annually on it, in 20 years you'll end up with an extra $189,000."

Why not make it 20% or 30%.  Wow!... then you would really have a lot of money after 20 years.

 

These are the same arguments Wall Street used to get Mr. Average to invest in things they did not understand.  How many Joe & Josephine Average can get a Safe 10% return on their money.  The game is stacked for those on Wall Street and those at the top.

 

Oh... and adjusted for inflation what is that $189,000 worth in Present Dollars?  These analysis always seem to leave out some of the important calculations and variables.

Mar 10, 2011 6:54AM
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I would really like to know just where I can park my cash and get 10% interest because I have 6 figures sitting in the credit union in a cd and only getting .60 interest. That's not very realistic.
Apr 20, 2011 11:18AM
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10% interest actually is not unrealistic.  I have a 401k invested in moderate to slightly aggressive funds and I earned over 20% last year.  A lot of people claim that only the top people or millionaires make money on Wall Street but if you put your money in decent funds through a reputable brokerage company, you really can make a good percentage most years.  Sure I lost a good chunk when the market went down, but I kept my money where it was and I've made it all back and more since then.  Beats spending every cent on junk or the latest and greatest cell phones, cars and such.  I might have an old cell phone, but I will be able to retire at a decent age.
Apr 20, 2011 11:53AM
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I disaggre with some of this.  Buying a large item with cash vs putting it on a credit card is a much better use for $3,000 then investing it.  First do you really believe you will get an average return of 10%?   Not going to happen and using the official inflation numbers from 1990 to 2010 $63k is worth about $39k in 1990 dollars.  Add to this that we know that the official inflation number is low and you see that investing your tax returns will allow you to live 3 extra years if you need about 30-35k a year in todays dollars.

 

Remember investing always tells you the huge future dollars you will have.  It never shows you what you would have in today's dollars.  Investing is fine but only if you have nothing better to do with the money like paying for a big item or paying off debt.

 

Also remember it depends which 20 years you use.  If we use the inflation of 1966 to 1986 we get $63k in 1986 dollars is only worth about $19k in 1966 dollars.  Really makes you want to invest doesn't it?

 

I also don't think you should always look for tax credits.  Yeah the tax credit migght be nice but does replacing a working water heater make sense to get the tax credit and minor savings on your energy bill?  Often it doesn't.  Yeah if you need a new one consider the one that gets you a tax credit.  But really is it smarter to buy the $400 water heater or the $4000 water heater?  You have to do the math personally to decide.

 

Then we come to number four that says if we are gonna waste it then waste it on a memory.  So instead of buying a new washer and dryer that you may need buy a vacation.  Seriously this article is all over the place.

 

Seriously who are your friends and family if they start looking for a loan when you get a $3k tax refund?  Normally your friends and family would be getting refunds as well and if $3k is a big windfall for you I doubt people look to you to borrow money.  Honestly this one is just silly.

 

Also I never understand why people make such a big deal out of getting or not getting a refund.  Do which ever you want.  Considering the kind of returns you get in a bank it's not like you are losing a lot of money by having the goverment hold it.  And for many people this is a great way to save for a big purchase.  Remember a $3,000 refund is less then $60 bucks a week.  Would you save it or would you have spent it?  Depending on your lifestyle do what you want.  Also I think all of us would rather get a refund of some kind vs owing money so make sure you don't owe.

 

 

Apr 27, 2011 11:40PM
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10% is easy with stocks. You must be patient.  I have rolled all my 401K's and IRA's over to my online broker accounts set up for the same programs. The mutual funds (which I hate) no longer are charged an annual management fee. It's now free. Now I have my Roth, 401K, IRA, and my general accounts in one place. As soon as I would get an account rolled over I would leave it in the funds they were in until I had selected a stock to invest in. Then I would sell one of the funds and reinvest the proceeds in the selected stock.

 

I mostly invest in stocks that are MLP's. This helps me big time on my taxes. The MLP's are shown as dividends, but are actually cash distributions before the company pays taxes. You get the advantage of their deductions as well as your own. I don't recall but I believe the distributions start  by paying back the principal first. This means you owe no taxes on the distributions until your return has been paid back in full. And because of the deductions you get from the company you have invested in it can take sometime before you actually begin pay taxes on the distributions.

 

You should sign up with an online broker who has a dividend reinvestment program. That way the money isn't sent to you every quarter and temp you to spend it. You can leave it in you account which goes into a money market account and pays some, but very little, interest. Then reinvest when you decide on a stock. Your choice.

 

I personally use TD Ameritrade.

Apr 20, 2011 9:41AM
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I didn't get a refund, somebody has to pay the taxes after all.

Sad

Mar 16, 2011 8:24PM
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I've figured several scenarios on what to do with refunds.  1.  Pay off a chunk of things  a.  winter utilities. b.  medical.c. small loans.,.  2.  get some furniture, and a freezer or two.  3.  get new glasses and have dental work done.  4.  take several mini, food-based vacations. 5.  buy blankets coats and other clothing and send it to Japan because we get a discount on clothing.6.  Pay myself., get a haircut, massage and visit my chiropractor.  7.  Play the lotto, here it supports our schools.  Buy something the school can use for next year. 8  Pay myself again, buy memberships at fitness center and buy a new swimsuit or 2.  3.  Pay a 4 H member to help me start a raised and vertical a vegetable garden and buy some soil and seeds and extra seeds for the church garden that feeds the poor.

 

Taking what we make and what comes in for the next 6 months of spring and summer, we can do much of that, but looking at sales, planning event trips around planting seasons and sales if fun and always a new adventure.

Mar 16, 2011 12:13AM
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this was a horrible report go by a computer to make you more productive lol what a waste!  or a course to make you more marketable almost all college grads cant get jobs another waste!  go on a trip you never been for a memory another waste!  donate it haha biggest waste of all you get absolutely no return from that or anything! your only good bet is to just simply save it or invest in something that you cant lose on like land or anything that will always have value! this video just cost people a bunch of money while that guys is burning it just stupid!


Mar 4, 2011 4:27AM
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The adjustable rate mortgage that I had before had me nearly to the brink of bankruptcy because of the never-ending payment increases. Now I have 3.18% fixed rate. I would absolutely recommend "123 Mortgage Refinance" I worked with to anyone I know planning to refinance mortgage.




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