By about January 3rd of this year, I had mentally allocated my tax refund money to the following: fixing the leaky strut on my 2005 Mazda 3, buying new shoes after getting caught up in the KonMari craze, saving for a well-deserved vacation, and paying down my student loan debt.*

Sound familiar?

Your tax refund may feel like a financial windfall, but too often it vanishes before you’ve truly thought through how to use it wisely.

Pitfall #1: Choosing direct deposit to your checking account

This sounds like a good idea in theory, but it ends up being a major failure. Sending the refund in its entirety to your main checking account is like putting the cash in your wallet… unless you are extremely disciplined, it’s liable to be spent thoughtlessly. Instead, have a portion (or all) direct deposited to a savings account.

Pitfall #2: Deciding how much to save after receiving the tax refund money

It’s easy to say “I’m going to save $100 out of this check” when the check is still abstract. Your resolve will weaken when faced with cash in hand.  This year, as soon as you know the dollar amount of your refund, determine the amount to save and have it deposited into your savings account.

Pitfall #3: Committing the tax refund money before you get it

When you know you have a nice check coming in the mail, it becomes easier to justify unnecessary purchases. Instead, stick to your budget and pretend the money isn’t coming.  It’s fine to mentally commit a portion of the refund check to your savings account. Other than that, don’t spend it until you have it.

Pitfall #4:  Using the entire tax refund amount to pay off debt

If you owe $1,000 on a credit card, it might seem reasonable to use your $1,004.50 to pay of your card and celebrate with a Starbucks latte.  Before you do this, though, check your emergency fund. If it’s empty, you’ll just end up using that credit card again for an unexpected expense. Put a portion towards your credit card bill, but don’t forget to fund your emergency account too.

Pitfall #5: Treating the tax refund like free money

Your tax refund is money that you earned, and then leant to the government as an interest-free loan. (How generous of you.) Remember that this isn’t the $20 bill you found in the parking lot. This is money you worked for. Spend it in a way that honors the effort you put in to earn it. 

 

*I ended up actually owing $131, but that’s neither here nor there.