Tax season has come to a conclusion, but you may still be waiting for your refund, depending on when you filed and the length of the IRS’s processing time.
Count yourself among the many people who will deposit their return into a savings account the moment it is received. 46 per cent of American consumers plan to do so, up from 40 per cent in 2020 and 41 per cent in 2021 according to a survey by LendingTree.
While saving for a tax refund is a sound financial decision, it isn’t the only one. To paraphrase, here are tax refund experts’ picks for the five worst uses of the money.
Buying things at random
There is a risk of losing your tax refund if it ends up in the same bank account you use to pay your bills and buy groceries, rather than being saved or invested.
It’s a bad idea to dig into your tax refund, especially if it’s easily available, such as if it has been paid to the same bank account where you keep your other money, says Access2Funding’s Yvonne Cooper, head of finance and chartered accountant.
In the absence of strict self-control, this makes it possible for you to withdraw and spend your money whenever you choose.
Expensive Goods That Are ‘Sale-priced’
Taxpayers who receive large tax refunds are ripe for the picking by retailers, according to Sean DiMercurio, a CPA and partner and founder of DiMercurio Advisors.
As a way of encouraging you to spend, they’ll put their most expensive products on sale—like gadgets. As a general rule, the folks who get the highest refunds are those who don’t make a lot of money in the first place.
Don’t spend a lot of money on gadgets or other high-ticket products unless you can afford it, or wait until you can afford it.”
While utilising your tax refund to pay down debt may be a good idea, it’s not a good idea to put off paying your credit card payment because you’re waiting for your tax refund.
In DiMercurio’s words, “Some folks wait for their tax refund to pay off their credit card debt.”
Your tax refund isn’t a good investment because you’re purposefully digging yourself deeper into debt.”
Interest is stacking up as you wait for your refund… Start paying off your credit card debt using the money you have. It’s best to deal with it now rather than wait for the IRS to send you a check, which may take months.
“As a CPA for small business owners, I see many people spending their return on items that they think would generate the money in the future, but really won’t,” DiMercurio said.
It might be used to cover the cost of a professional development course or conference, for example. It’s possible to use these skills to make money, but only if you put them to use.
Don’t make the mistake of investing money in development and then expecting it to pay off quickly. This kind of purchase is fine, but you’ll have to put in some effort to get your money’s value out of it. “
When you can’t afford to keep paying for something, you should invest in it
Darren Veerapa, CPA and founder of Mr Tax Guy, says that enrolling your children in a private school without considering the actual costs of their entire stay are a poor choice for a tax refund because they don’t take into account the ongoing maintenance costs of boat ownership.
There is no good reason to put your money into something you can’t afford, such as a new car, until you get your tax refund. Before the tax refund, if you cannot afford the ongoing expense, you probably cannot afford it afterwards either.
According to DiMercurio, instead of spending your tax refund on things that won’t bring you a return on your investment, the best use of it is to start a side business or contribute to a tax-deductible retirement account.
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Money is required at the beginning of a new business or side job. Taking advantage of your tax refund is a great way to pay for those expenses.
You may need to spend more than your tax refund. It’s possible to get back your tax refund and more if you spend both time and money wisely.
At some point in the future, one of your goals should be to make enough money so that you won’t have to pay taxes.
It’s a good idea to put the money you get back from your taxes into your retirement account, especially a traditional IRA account, which may be tax-deductible.”
Right away, it saves you money in the long run. Until you take money out of your traditional IRA, you won’t owe any taxes on it.
