Tuesday, April 5, 2011

5 Dumb Things Smart People Do With Tax Refunds

Tax time: That interestingly peculiar time of year when ordinarily smart people begin to make really dumb financial decisions. Isn’t it amazing to watch what a little extra cash, okay well for some, maybe a lot of extra cash lining the pockets can do? The average tax refund for 2011 may be a little over $3000, but there has to be several thousand dumb things people are doing with the money at any given moment. I know your pockets are sizzling even as you read, so I’ll be brief and just give you 5 dumb things smart people do with tax refunds.


#1 – Act like its FREE money. The operative word in the term “tax refund” is REFUND! Common synonyms for refund are “repayment,” “reimbursement,” and just plain simply, “money back!” This means that tax refunds are not free money! The government is not giving you a bonus every year just to thank you for being an American. This is money that you’ve allowed them to “borrow” from you all year long. And now, unlike most of your friends or family members, they are actually paying you back. Never mind the fact that they are paying you back with NO interest even though you pay them back with interest on your student loans. . . . I mean, who’s keeping tabs, right?

While you were patriotically overpaying the government you could have been doing a dozen other things with the money YOU worked for, allowing your money to actually work for you. So, for heaven’s sake, please stop acting like April 15th (April 18th this year if you want to be technical) is a damn holiday. Let’s call it what it is: “Happy You Got Played By Overpaying the Government Day!”

Related Post: 5 Habits You Need To Break in 2011

#2 – Don’t budget it. The mindset that tax refunds are free money typically leads people who ordinarily utilize a budget, to leave refund money off the financial plan radar. Typically, by the time you think about budgeting it, it’s because you’re down to your last few hundred dollars and all of a sudden want to “be responsible” with it. The reality is tax money should be approached similarly to how you would approach your paychecks; after all, it’s nothing more than the money you really worked for all year long anyway. Even if you apply skewed percentages to determine how you disperse the money, just use some type of logical system! Just running through it and blowing it daily on insignificant and useless purchases is not the way to go. (Disclaimer: For those of you who never budget . . . consult someone who does. Your idea of logical may be a little questionable.)

#3 – Pay off too much debt. I know you’re thinking there is no such thing as “paying off too much debt.” But, in reality there is. If you use your refund to pay off debt, but don’t have an emergency/opportunity fund in place, you’re not really making progress. Let’s say you use the entire refund to pay off a credit card balance in April, but in May you have an emergency. Because you have no savings, what are you going to do? That’s right! You’re going to put that emergency expense on your credit card. By June you can end up right back in the scenario you were in before the refund came.

Instead, strategically pay down your debt. Definitely put a large chunk towards paying it down if you can, but leave at least $1000 to the side in an account that you can easily access, if necessary. (Note: This account does not mean in your checking account! I don’t have to tell you why that’s not going to be helpful!)

Related Post: How To Handle Tax Time Bill Collectors


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#4 – Save all the money. This is simply the reverse of #3. Don’t save the entire refund when you have high interest rate credit cards or even a small student loan balance that can be wiped out. Again, you should have a healthy balance in your personal finance efforts which allows you to save money and pay off debt simultaneously and systematically.

Related Post: How To Set Financial Goals You Can Achieve

#5 – Make a down payment on something they can’t ordinarily afford. The burning sensation is too overwhelming. A feeling of prosperity and richness ensues and forces, I mean literally strong arms people into putting money down on a new car, boat, furniture, etc. Here’s the thing to remember: After that down payment, you’re still responsible for the pesky monthly payments that linger around far after. Even though you’re feeling good right now, remember that April 15th only comes around once a year. Make sure if you have plans on using your refund in this way, your monthly budget can handle the payments you are signing up for. If not, the “blessing” of tax money can quickly become a nightmare if you’re not careful. Use the refund to abolish your bills, not create new ones. And, as my friend and sister in the personal finance movement, Tiffany Fitzgerald at TiffTalks radio says, “Don’t create on-going debt with one time funds.”

For great tips on the smart things smart people do with their tax refunds, check out the following resources below.  If you have other great articles on the topic, please share them in the comments. If I agree, I'll definitely add them to this list of resources!

Frugal Dad: 20 Things To Do With a Tax Refund
TiffTalks Radio: You Did WHAT With Your Tax Refund?!?

Until Next Time,

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6 comments:

Davids135 said...
This comment has been removed by the author.
Davids135 said...

Right-on right-on!

Dennis Howell said...

Solid and Timely Advice Patrice.

I totally agree with you on the importance of an EMERGENCY FUND.

People have no idea how much difference as little as $500 stashed away in the bank can have on preserving your budget when untimely mishaps like a car repair or dental bill come up.

Here are my Fab 4 Tips on How to Use Your Tax Return:

1. Emergency Fund of $500 to $1000

2. Life Insurance Protection if you don't already have a policy

3. Credit Card Debt

4. First Home Fund (2011 is a Great Time to Rethink Owning a Home)


Much Love and Continued Success,

Dennis

Sunshine said...

Great post! I've been telling anyone that will listen these 5 simple rules for the last 15 years! I just don't understand why people chose to 'blow' this 'free money' year after year. #foolish

Anonymous said...

great post!!!than God for emergency funds lol....i used my emergency fund to fix my car this past weekend!!

Execumama said...

Love this post!! I really took notes with the "paying off too much debt" pointer. Thanks, and great meeting you at Ronnie and Lamar's :)