Common Mistakes Made with Tax Refunds

On average, Americans received over $3,000 in tax refunds last year. For a significant number of those people, the immediate response in having that amount of money on hand is to start spending. However, without first analyzing where the money should go, these individuals buy all kinds of things that add no real value.

With tax refunds just around the corner, you have the chance to give serious thought as to how your money should and should not be spent. After all, the goal is to get the most out of your refund, which is possible by avoiding common mistakes.

Tax Refund Mistakes

  • Spending Frivolously – With a check for $3,000 or more in hand, spending frivolously becomes extremely easy. Of all the mistakes that people make with tax refunds, this is one of the biggest. In truth, after going on a spending spree, most people realize they bought things they would never purchase had the tax refund money not been available. A much better option is to find ways of allowing the money to work for you. For example, if you upgrade your Auburn home with energy-efficient appliances, next year you get a tax break that will increase your refund. You could also put $3,000 a year into an IRA account, watching it grow to $180,000 in 20 years. Even short term, you can spend wisely. Instead of buying “stuff,” plan an amazing family vacation that will create lasting memories.
  • Not Getting out of Debt – If you have a few bills that need to be paid, especially high-interest credit cards, you can use your tax refund. Rather than blow the money on things that you really do not need or will never use, put it to good use by reducing debt. If you need support and guidance, consider talking to someone about credit counseling.
  • Adding New Debt – Each month, you follow a budget. By going over that budget, you could easily face a bankruptcy filing. To avoid needing the services of a qualified Auburn bankruptcy lawyer, avoid adding new debt to your set budget. As an example, using the $3,000 as a down payment on a car may seem like a good idea, but looking long term, you will realize the monthly car payments will wreak havoc on your budget. Simply put, never use a tax refund to add new debt.
  • Living Outside of Your Means – Another common mistake that people make at tax time is using refunds to pay off continual debt. If your current lifestyle results in your debt going higher or remaining the same even after making monthly payments, something has to give. In addition to the $3,000 not getting you out of debt, using the money to chase debt is basically throwing it away. If your debt is out of control, along with a change in lifestyle, you might need to consider debt consolidation or filing for Chapter 7 or Chapter 13 bankruptcy.

By avoiding common mistakes associated with tax refunds, you have the opportunity to enjoy life without being strapped with debt. Rather than go on a shopping spree the minute your tax money becomes available, take some time to really think about your financial goals, both short and long term.

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