Wednesday, April 1, 2015

What not to do with that tax refund

To spend or not to spend your tax refund. That's the question making the rounds again now that tax season is upon us. By the way, I'm not sure what all the fear mongering was about with the IRS being understaffed or unprepared for tax season. My family's returns were filed effortlessly thanks to the E-filing method and our refunds were delivered within a week, including my son's request for a paper check.

Back to the topic of what to do with that refund. The obvious feedback is to save either all or most of it. It makes sense to put some of that "free" money away before you spend it, but what if you need that money right now? It happens that we make purchases sometimes in anticipation of an expected check that's on the way, but boundaries must be set when debating the spend/don't spend issue. But rather than tell you how to use your money as the status quo is, I'm going against the grain here by telling you what not to do with it:

1. Place it in a low-interest bearing savings account. I have this strange feeling that I've just been blacklisted by some of the finance connoisseurs out there, but hear me out. Right now, your basic savings account is offering less than one percent interest. It's better than earning no interest, but if your refund is modest, you really won't be earning all that much of a return right now. There's been talk sometime now about interest rates rising, and there has been a small, incremental climb, but not enough to invest a modest refund in. Use that money to open a retirement fund if you don't have one, or contribute to an already existing one. That's where the real returns are.

2. Blow it on a big expenditure. Before you run out and buy anything, make sure your debt is under control. If you're carrying a hefty one, I strongly urge you to use some of that refund to pay that debt off. No need to delude yourself at this time by perceiving the refund as a bonus. Not when you're carrying debt it's not.

3. Gamble. If you've studied statistics at school, you know damn well that your chances of increasing the amount of that refund through gambling is very close to none. If gambling is your pastime, as it is with some people, then maybe a little portion of that refund to pass your time away is okay. If you're looking to test your luck because you finally received some money back, find other constructive ways to use it. You'll have more luck with the stock market if you're really bent at thinking of money as a good luck charm.

4. Forget to pay your other obligations. Yes, I received a very modest (and disappointing) refund, but I also owe the state money now. So, guess where my first post-refund check is heading? This ties back to Pt. 2 above: pay off your obligations first before you even consider making any new purchases. Your credit score will love you for siding with accountability, and you'll sleep better at night.

5. Fall for any schemes. It's a reality that there are predators out there waiting to pounce on the first na├»ve, unsuspecting consumer waiting to use his money on some get rich/skinny/exclusive brand name purse/new car strategy. Don't fall for any of it. To avoid becoming a victim, just remember this one simple rule:

If it sounds too good to be true, it is.
This also aligns with knowing the difference between needs and wants. The best way to avoid any regrets? Go home and review your finances. Look through your accounts and statements and decide for yourself what's the best way to use that refund. If you're still unsure, ask a consumer credit counselor or just go ahead and deposit the money into your simple savings account until you are sure. 

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