3 of the Best and Worst Ways to Spend a Tax Refund

Today’s post is written by a good friend of mine, Nate VandenBerg. Nate is an experienced CPA who helps people make wise decisions with their money. Enjoy this helpful article.


Photo credit: cohdra from morguefile.com

Over 100 million people this year are expected to receive a refund from Uncle Sam when filing their taxes. At $2,800 for the average refund, millions of taxpayers will have to make the decision on what to do with the refund check.

The traditional options of paying off credit card debt, saving for retirement, or saving for college are great options.

Here are 6 “alternative” options for spending your refund check that have the potential to change the trajectory of your finances and relationships.

Best Ways to Spend a Refund

Prepay your mortgage

Save 8 years of mortgage payments by applying your tax refund to your mortgage! This is real, it actually works! Don’t assume the mortgage schedule your bank provides you is the only timeline to pay off your mortgage. You can save $65,000 of interest over the life of a $250,000 30 year mortgage at 4.5% by using your refund every year to pay down the principal of your mortgage. This results in a payoff a 30 year mortgage in 22 years!

Start a Business

Always wanted to start that blog? Launch your dream product? Write that book? Using all or a portion of your refund to fund your start up business could be a life changing event. What if you fail? Then you just paid $2,800 for one of the most valuable learning experiences you will ever have in your life. Apple was started with $1,750. Starbucks with $4,050 split among 3 people. Take the leap.

Take Your Family on Vacation

Probably not the advice you were expecting to see under the Best list. Don’t waste your money and spend frivolously. Plan it out, get the best deal you can and set the money aside to be used for the vacation. If you have children, the only job that you specifically have been assigned to do is to be the mother or father of your children. That’s a special assignment, be wise with the time our God has given us and create memories with your children they will cherish forever.

Worst Ways to Spend a Refund

Put Money Down on an Item you Can’t Afford

“Pay us $2,800 and we’ll let you pay us $300-$400 every month for the next 5 years! In exchange, we’ll provide you with an asset that loses 60% of its value in those 5 years!” Sounds like a fantastic proposition right? Wrong.

I’m sure you’ve heard an advertisement like that, it’s just phrased differently. For some reason it doesn’t have the same ring as “Buy a car from us by April 15 and we’ll double your tax refund!” My point here is, if you can’t afford to purchase a new car without your tax refund, it probably isn’t a great idea to purchase it with your tax refund. Don’t turn a tax refund into a debt payment that you’ll have to pay for the next 5 years.

Nothing

Most likely, human nature will take over if you deposit your refund check into your bank account without a plan of action for the funds. You know that Starbucks habit you have? Love to go out to eat? These are not bad things, but congratulations you just fueled the habit! Without a plan of action for the cash it may slowly erode over time and 3 months down the road you’ll look back and not have anything to show for it.

Buy One of These

You can buy anything off of ebay! In March 2008 somebody purchased a cornflake shaped like the state of Illinois for $1,350! Please, I beg you to not make a purchase like this with your tax refund. But, if you do, at least persuade the seller to throw in the Florida cornflake for another $1,450 to round out your purchase to $2,800!

If you are one of the over 100 million people that will receive a tax refund this year, consider using it to pay down your mortgage, go on vacation, or start a business. Or, if your heart desires, buy that cornflake.

What is the most memorable way you have used your tax refund in the past?

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5 thoughts on “3 of the Best and Worst Ways to Spend a Tax Refund

  1. This year we’re paying the deductible to get my car fixed (minor fender bender about 2 weeks ago, thank God for car insurance!), eliminating a $200/month bill with Rent-a-Center (our washer & dryer suddenly up & died last year, and we use cloth diapers!), getting some things for the new baby due in June, a date night for Mommy & Daddy, and the rest gets split between us for little things.

    We tend to put our refunds to the general purpose of eliminating bills so that the money we save during the year can be put to better use. One year we got enough we paid off our truck and hubby’s student loans all at one go! I foresee an actual summer vacation this year (well, maybe late fall!), and definitely plenty of trips to the zoo and aquarium for our two year old!

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