For many Americans, receiving a tax refund can feel like an extra payday, but treating it like bonus cash can set you back in the long run.
If you’re expecting a large refund this year, you’re probably checking your mailbox (or bank balance) every day, asking “Where is my tax refund?!” But if your excitement towards your IRS tax refund is fueled solely by your plans to immediately spend it, you might be wasting a huge opportunity to get ahead, financially. Yes, that’s right: One of the biggest mistakes you can make with your tax refund is spend it.
According to Wallis Wilkinson Tsai, founder and CEO of AboveBoard, an online destination for families to plan and better manage their financial situations, you should always resist the urge to spend your tax refund and instead put it forwards creating a future where you’re free from financial stress. Though it might not seem like a check for $3,000 (the average tax refund) will solve all your money problems, a little bit can go a long way... if stashed away correctly.
If you have high cost debt, like credit card balances or personal loans, use your tax refund to pay it down. Free from high cost debt? Tsai told RealSimple.com in an email that she recommends revisiting your savings goals. If you’re looking to have more cash on hand for emergencies or even looking to put a down payment on a house, make sure that refund goes directly in a savings account. For those who don’t necessarily need additional liquid assets and instead would rather work towards long-term goals, like retirement, Tsai says the best option is to invest your refund in a mix of stocks and bonds.
Haven’t begun to fill out your tax forms yet for fear of flubbing? Here, four common tax-return mistakes to avoid, so you can make sure yours is flawlessly filed.