According to the IRS, the average tax return is approximately $2,800. While this seems like a welcome, sizable gift, it isn’t a gift at all. It’s your money – you are just getting a refund on your overpayment to Uncle Sam. So avoid the urge to blow your hard-earned money and follow these tips to use this money wisely.
- Pay down your high-interest debt. Interest on debt cancels out any interest made on savings, so hanging onto debt unnecessarily is unwise and costly. If you don’t have any debt, take the opportunity to boost your emergency savings or retirement fund.
- Make yourself more productive. Take a class to boost your skills, or finish that degree you’ve only partially completed. Look at your refund as a tool to invest in a better you.
- Help others. Donate to your favorite charity or give to someone in need. Either way, you are helping someone else and helping yourself with a nice deduction.
If you don’t have a solid idea of what to do with your money this year, at least make a point not to blow it. Here are some ideas of spending mistakes to avoid:
- Avoid further debt. Don’t make the mistake of using your refund as a down-payment for a loan on a depreciating asset such as a car or boat.
- Don’t loan to others. Loaning money to friends is often the quickest way to end a friendship. Either keep this windfall for yourself, or make the item to your friend a gift, if you can afford it.
- Avoid spending on large items. Just because you have a temporary windfall doesn’t mean you can afford to live a lavish lifestyle. So avoid the urge to purchase a luxury item that you otherwise wouldn’t be able to afford.
Finally, if you find that you are getting a large refund year after year, consider adjusting your paycheck withholdings by updating your W-4. Sure, it’s your money either way, but it is often more beneficial to keep a little extra money in your paycheck each month to use throughout the year than wait until the year is over.