Congratulations: If you’re like 80% of the population, you are getting a tax refund, and it’s averaging $1,600 this year. A financially responsible person might opt to pay down debt or invest the money — but temptations to spend it are everywhere. But someday you might regret not putting your windfall to better use, and that’s why you don’t want to spend your tax refund on any of the following things.
Gambling
If you gamble the money, you might lose the entire tax refund — and then some. Gambling can become addictive, and as a habit it’s a wealth killer. The myth of the career gambler is — well, it’s a myth that you only see in movies.
Most people who gamble full time end up breaking even at best but more often they go broke. If you want to turn your refund into more money, put it into the stock market.
Partying Too Heartily
It’s one thing to celebrate a windfall and another to turn the celebration into an ongoing thing. Intoxication typically weakens your inhibitions and makes you prone to make decisions you might regret later.
Just ask anybody who’s gone shopping while drunk how they felt about their purchases the next day (unless, of course, they opted for the hair of the dog, which would be even more bad news for the pocketbook — don’t spend your tax refund this way).
Don’t confuse this particular warning one with any kind of moralistic trip about inebriation. Rather, this is a type of spending that can snowball quickly and in a bad way.
Contraband on the Dark Web
Speaking of which, might feel the temptation to go shopping on the Dark Web for — well whatever the vice might be that you have in mind, it’s easier than ever to get caught.
Although you supposedly enjoy anonymity when you surf this part of the internet, in reality there’s actually plenty of law enforcement types doing surveillance who manage to track people down this way.
Furthermore, even paying for things in cryptocurrency doesn’t necessarily afford the same degree of untraceability that is used to due to the advent of blockchain — the same technology that has been cutting down on fraud helps the authorities nail people buying illegal goods on the Dark Web.
Impulsive, Excessively Risky Investing
While investing your tax refund is always an astute move, rushing into any investment doesn’t bode well — especially under current conditions. With market volatility rising, professional investors and algorithmic trading make it hard for individual investors to get ahead — so the last thing you want to do is go overboard with risk right now.
For certain asset classes, prices can move against you faster than you might be able to unwind the position. Examples would include leveraged exchange traded funds, options, futures, any other type of derivative and even cryptocurrency exchange transactions.
Pay attention to the risk disclosures for anything you’re considering putting money into, and while you’re at it, read as much as you can about any investment before buying.
Loan Collateral
Before you go take out a loan for anything, remember that borrowing costs have reached a ten-year high — in terms of interest rates. If you’re looking at mortgages or academic financial aid, an additional cost comes from the Tax Cuts and Jobs Act.
The law capped the deductibility of mortgage interest to the first $750,000 in principal value; it made student interest nondeductible and also put a $10,000 ceiling on deductions of state and local income, sales, and property taxes.
New Car
Although using your tax refund as any kind of loan collateral is bad news, auto loans are a different headache than mortgages and student financial aid. You simply cannot rationalize this one an investment because autos depreciate quicker than most other types of assets you could buy.
Adding insult to injury, the prices have gotten a bit steeper because dealerships have drastically cut back on offering buyer incentives over the past year or so.
And with interest rates rising, financing criteria has gotten stricter so you may have to pony up additional funds just to make the down payment. Make do with the vehicle you already have and put the tax refund to more productive use. Or if the kind of work you do requires a new-looking vehicle, consider leasing instead of buying.
Loan It to Flakes
You might be feeling generous because of your windfall but try to think critically before saying “yes” to a request for money right around the time that tax refunds go out.
As noted already, eight in 10 households are getting refunds this year — so did the person who wants to borrow money from you already spend theirs?
If they didn’t get a refund at all, of course it’s a fallacy to presume they don’t have the means to repay a loan — but you might need to assume that you won’t see the money again.
Don’t Spend Your Tax Refund Foolishly
Rewarding yourself now and then can help you stick to a budget longer term, but if you go overboard on the indulgences you might regret it later.
If you have outstanding debt, make paying down the balances your first order of business. Then if you have any money left over from your tax refund after that, invest it or set up an emergency fund if you don’t have one already).
Readers, how much are you getting as a tax refund and what are your plans for the money?
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Learn more about taxes by checking out these other stories from our archives:
- When’s the Last Day You Can File Taxes in 2018?
- Which States’ Taxpayers Are Getting the Best Refunds?
- How the Wealthy Avoid Taxes in 2018
- Dude, Where’s Your State Income Tax Refund?
- How Long Can You Postpone Your Taxes?
- Tax Withholding Calculator Debuts on IRS Website
- Beware of Fraudulent Tax Return Scams`
- Will There Be More IRS Audits Under the New Tax Law?
- When Do You Pay Taxes on Bitcoin and Other Cryptocurrency?
- What’s the Deal with the New Tax Law?
- Attention, Shoppers: 2018 Sales Tax Holidays
- Should You Prepay Property Taxes Now?
- Which Country Has the Highest Taxes?
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