It's not often in life that we get lump sums of cash, and the temptation is great to do the wrong thing. In case you're not quite sure what the wrong thing is, here's a quick checklist.
According to the IRS, the average American tax refund for tax year 2010 is about $3,000 – a slight increase over the previous year.
But whatever you’re expecting this year, 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…
10 Dumb things to do with your tax refund
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 percent 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?
To learn more about investing, check out our investing section.
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 percent if you invest your tax refund, here’s a sure thing: If you’re paying 15 percent interest on a credit card, paying it off is the same thing as earning 15 percent, 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 percent on your electric bill every month for years to come, and get you a tax credit next year equaling 30 percent of the cost. So 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 either.
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. Check out Beware of These 3 Stupid Tax Tricks 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.
Where’s my refund?
If all this sage advice has you chomping 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.