The Worst Ways to Spend Your Tax Refund (And What to Do Instead)

I've seen many people get into trouble with their spending habits, especially when they have extra money and don't save it. Over the years, I've observed some of the worst ways tax refund checks have been spent.

A Down Payment on a New Car or Boat (Lease or Purchase)
Depreciating assets is one of the worst ways to spend your money. Generally, when someone puts a large sum down on a car or boat, they believe it will help reduce their monthly payments. However, they are often still paying high interest rates. Many times, they won’t be able to pay off the loan before the vehicle or boat breaks down. While salespeople may counter concerns about high interest by offering refinancing options, interest rates haven’t improved much in recent years. If the loan balance exceeds the asset’s value, refinancing may not even be an option. Ideally, you should be able to make these payments in line with your income and expenses without needing extra funds to cover them.

Paying Off Small Debts with the Lowest Interest Rates
It may feel great to pay off a small loan, but if that loan has a lower interest rate than others, you're potentially prolonging your financial struggle. Instead, prioritize paying off higher-interest debt to reduce the total interest you pay over time. These loans might have larger balances, but by tackling them first, more of your payment will go toward reducing the principal, helping you pay off the debt more quickly.

Putting it in a standard savings account for a large purchase
At first glance, it may seem like you’re making a smart decision by saving your money. However, with current inflation, you could actually be reducing the value of your savings. Considering a high-yield savings account or a fixed CD for a set period is a better way to maximize your returns. When evaluating a CD or high-yield savings account, be sure to consider the duration and your liquidity needs.

Ultimately, the key question to ask is: Will this purchase contribute to future debt, or will it help grow the assets in my portfolio? If you're someone who struggles to see the long-term impact of your spending beyond immediate gratification, it's wise to consult a financial advisor for guidance.

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