What not to do with your tax return

I just got a call the other night from a friend of mine. We were talking and the conversation ended as he and his wife were going to go pick up their taxes from their tax accountant. One hour later I got a phone call from the same individual asking me questions about the best computer and digital camera to buy. Turns out his accountant told them that they would be getting a refund and they were busy spending the money before they even officially filed their taxes. They were going to buy a new computer, digital camera, PDA, and possibly a new tv. I have no idea what they got for a refund, but my guess is that their expenditures are probably going to outweigh their tax refund.

Money burning hole in pocket
photo by Jae Lynn

This another one of those things that I have a hard time understanding. Why is that when people come across unexpected money that they have to spend it immediately. When I was talking to this individual I started recommending he look around on-line for some of his purchases as he could likely get a much better deal than shopping at circuit city and honestly I was just trying to have him put the “make believe” money down for a few hours and think about things. Unfortunately he really didn’t want to wait to go home and do research, he wanted his toys now, and that money was just burning a hole in his pocket.

Me on the other hand I tend to be the complete opposite. I have trouble forcing myself to do something fun with the money and usually use it to pay down my debt or save for something bigger like retirement. In fact since the first of the year, I have come across over $3,500 of completely unexpected money and did not spend a penny of it. It all went towards paying off our HELOC.

Now I’m sure there is a happy medium here on what to do with unexpected money and I think I can come up with some general ground rules on what to do with unexpected money.

  • STOP – RELAX – THINK. Don’t think you have to do something with this money right this second. Let your emotions die down and really think about the best way to use this money. Make sure you will be completely happy with your decision and give yourself a chance to think out of the box a little bit. Rushing into things is only likely to make you feel like you ended up wasting your money on something you really did not need.
  • If you have debt, especially high interest credit card debt, you should probably be using a large portion of your unexpected money to pay down this debt. When you are paying 20%+ interest the only way to get ahead is to make large payments towards that debt, otherwise the interest will just keeping digging you in a hole. Debt is a very stressful thing for most people and feeling like you are getting a leg up on it can be very rewarding.
  • If you are behind the ball on saving for retirement go ahead and use some of it to start or add to your retirement accounts. Again this is a very stressful part of life for most people and it can give you a sense of relief to know that you are better off than you were yesterday. Remember the most important thing about saving for retirement is that you START and start NOW.
  • Have fun with some of the money. Do something you normally wouldn’t do and something that you and your family will truly enjoy.

This is where the balance comes in. Your individual situation is going to tell you which end of the scale you should be on. If you have high credit card debt or haven’t started saving for retirement I would recommend that a majority of your money goes to that area. If you are a scrooge like me and have trouble splurging here and there maybe a larger part of it should go to something fun, like a vacation.

The real lesson here for spending unexpected money and money in general is, spend it on what is truly going to make you happy. Think happy a year or two from now and not 30 minutes from now. If it’s the act of spending the money that is making you so giddy about what you are doing with your money than you probably should sit back and wait for a better idea, because in a day or two that feeling is gone, and then you are stuck with some junk you really didn’t need or want and a pile of debt, no money saved for retirement, and no money to take that trip with the family this summer.

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6 thoughts on “What not to do with your tax return”

  1. This was so me about 5 years ago, I can remember being in University and getting a nice refund around tax time and was just like your friend out purchasing something that I likely didn’t need. I would go get a new TV or gaming system when I already had a perfectly good one at home. Oh how things have changed, it took awhile but I now focus any additional revenue on debt repayment or savings which in the long run will allow me to enjoy my life and buy my toys.

  2. This to me is a huge problem. What folks really should be doing with their tax refunds is investing it in something like mutual funds or even bonds.

    The thinking by most people is that a tax refund is free money. Money that’s simply fallen into their laps.

    It’s not free money. Essentially a tax refund is a free loan you provided to the government. It is money that was actually worked for.

    I always recommend that investing, not frivilous spending should be the plan with tax refund money.

    Heck, maybe even pay down some credit card debt!

    OK, I get a bit frustrated when I hear these stories because it’s these same folks who will be feeling the burdens of being deep in debt.

  3. Some people get a thrill out of buying consumer goods. I get a thrill out of buying investments — I love watching the stock symbols and tracking the price changes. I have a sense in the back of my mind that my asset allocation target is not yet complete so I already have lumpsum moneys dedicated for that purpose.

  4. I think American’s are addicted to their tax refunds. It’s crazy because you’re loaning the government your money. Why do that? So you can get a big check once a year and blow it? Almost every American I knew looked forward to their tax rebate like it was Christmas. Amazing.

    Joe

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