How Not to Spend Your Tax Refund: Tales of Woe and Regret
Being a responsible citizen, you dutifully file your tax return every year. The potential “fun" part of wading through W-2s and 1099 forms? Your refund. With the average tax refund in 2018 being a hair under $3,000, and despite this year’s refund check looking a bit lower, that still might be the largest wad of cash you’ll receive all year long.
The Rules of Adulting urge you to spend that money responsibly to look out for Future You. But when we have a more sizable sum of cash sitting in our bank account, we could be more prone to hemorrhaging cash. It happens to the best of us...even the ones who are fiscally responsible for a living. So, we asked four personal finance bloggers to share their tales of blown tax refunds and suffered remorse. Because, one, we’re all human, and maybe, just maybe, you can learn a thing or two from their mistakes.
When Amy White, a 42-year-old business consultant, and her then-husband were broke-as-could-be college students, they got a hefty $3,300 check from Uncle Sam. They decided to throw their money into an old Jeep. They purchased the bright red, classic 1981 CJ-7 Renegade from an uncle, who restored old vehicles. They bought it due to necessity and timing: They needed a car, and it just so happened that the uncle was selling a used set of wheels. The couple had to use an additional $2,000 from their student loan money to pay for it.
Despite both their families advising them not to buy it, they went ahead and sprung for the car. The Jeep turned out to be a clunker, and during the two years they owned it, they threw down about $5,000 in adding a black roll cage, liner, lights, and fun extras they could’ve done without.
“[At the time] it was one of the absolute worst financial decisions I've made in my life,” says the Phoenix, Ariz. native and founder of Daily Successful Living. “We should have spent it on college tuition rather than digging ourselves deeper into debt.”
What to do instead: Pay yourself first. Save some money before it goes toward living expenses. Whenever White receives “extra cash,” she now sets at least 10 percent aside toward retirement planning. “Once I've put my retirement money aside, I then use the money according to what my current financial goals are,” she says. “For example, since we are debt-free except for our home, I would use 50 percent of the money toward something fun, like a vacation, and put the remaining 40 percent toward paying off our home early.”
When Kyle Kroeger, founder of Millionaire Mob, got a fat check of $5,000 from his first “real adult job” in corporate finance, he told all his friends, “Drinks on me!” Throughout a series of outings with a cadre of his closest buds, he threw down money on pre-dinner drinks, dinner, and post-dinner outings at bars — not to mention the innumerable Uber rides as they cavorted around town.
“Working in corporate finance, felt like an environment where buying things could feel like a competition,” says Kroeger, 30. “After a few of those nights, the money spent adds up quickly.”
While he owed about $60,000 in student debt at the time, that didn’t stop him from continuing to spend. He stocked up on various winter wear from brands like Patagonia and Lacoste. Also, Kroeger frequented local men’s dress wear shops and bought a $1,000 designer suit for work.
“When it was all said and done, I didn't have much to show for it,” says Kroeger. “That did not feel good.” Instead of keeping up with the Joneses and impressing his friends, Kroeger wishes he had focused on paying that money on debt.
What to do instead: Instead of blowing your money on booze and fine clothes, consider using your tax refund toward paying off debt. Ideally, you’ll want to focus on “bad debt,” which is high-interest debt in assets that lose value over time. High-interest credit cards, payday loans, and personal loans you use for say, a vacation, are all typically considered “bad debt.” Because you’re paying so much in interest fees alone, the quicker you can crush your bad debt, the more money you’ll save over time. While the general rule of thumb is to focus on “bad debt” first, there’s no harm in knocking out “good debt,” which are usually lower interest, and build value over time or help you generate money in the long run. Student loans, mortgages, business loans, and car loans are usually thought of as good forms of debt.
When Mike Pearson and his wife received $3,500 for their tax refund in 2013, they used the money toward their wedding: a private bus shuttle for the wedding party and for a private choir to sing a few songs during their church ceremony. “At the time, we thought these little touches were worth making our wedding day that much more special, and we rationalized that we’re only getting married once, so why not splurge on a couple extra things?” says Pearson, who is 37 and the founder of Credit Takeoff.
In hindsight, that money could’ve helped lowered their wedding debt of $5,000. The total cost of their wedding, which had 135 guests and was held in a restaurant in downtown Manhattan that overlooked the Statue of Liberty, ended up being $25,000.
“Weddings are expensive enough without spending even more on trivial things like we did,” says Pearson. “Looking back, we should have saved that $3,500 to help pay off some of the debt we went into paying for the rest of the wedding expenses.”
What to do instead: First, if you don’t have an emergency fund established, you should start there, recommends Pearson. You’ll want to save anywhere from three to six months of living expenses for a cash buffer. If you work for yourself, aim to have more closer to six months stashed away.
When Jon Dulin received his refund of $3,000 a few years back, he used that money to buy a second car. The thing was that he already had a nice car. “I was driving a nice sports car and enjoyed mountain biking,” explains 40-year-old Dulin, founder of Compounding Pennies. “[The bike] couldn’t fit my bike in the car and didn’t want to buy a bike rack for fear of scratching the paint or dirtying its interior.”
Dulin threw down a total of $5,000 on a used Volkswagen Golf — including $2,000 of his own money — and it turned out to be the dumbest thing he ever did.
“I could’ve spent a few hundred on a bike rack and saved the rest of my money,” says Dulin. He ended up forking over an extra $1,500 on repairs on his second car, plus $400 a year in insurance.
What to do instead: Consider spending some of your refund, then saving the rest. Make a pact with yourself: Blow a percentage of your refund on whatever you like, and commit to using the rest toward saving it or paying off your debt. “That way you get the joy out of spending a small windfall, and still improve your finances,” says Dulin. One more thing: Consider opting for direct deposit. Having your refund directly deposited into your account can help you keep some of it. Money you don’t see is money you (most likely) won’t spend. The IRS actually allows you to divvy up your refund and have it deposited up to three separate bank accounts. By choosing their route, you’ll be responsible with that money before it even lands in your hands.