How Not To Spend Your Tax Refund

Unexpected money is always a great thing. When you get a surprise lump sum of money, you can't help but dream about all the things you can buy. That new plasma television. A new wardrobe. A much-needed vacation.

If you're due a tax refund this year, you've probably already started thinking about how you're going to spend it. Before you finalize your plans, make sure you're spending the money wisely. Here are some ways not to spend your tax refund.

• Before you even get it. There’s a reason that you shouldn’t count your chickens before they hatch. It's because they might not hatch at all. If you starting spending before you have the tax refund in hand, you could end up in serious financial trouble. An accounting error could cause you to get receive a lower refund than you were expecting. So don’t write any checks or swipe your debit card until the money shows up in your bank account.

• As soon as you get it, unless you’re paying off bad debt. Cashing your tax refund check and heading to the mall within minutes of each other is a formula for disaster. If you spend your tax refund the day, or even the week, you receive it, you’re much more likely to splurge than if you put the money aside for a few weeks or even months. The only exception to this rule is if you’re using the refund to pay off debts, especially those leftover Christmas debts.

• By splurging the entire amount. There’s nothing wrong with wanting to use your tax refund to treat yourself, as long as it's done within reason. You don’t have to use the entire refund to finance a seven-day vacation to the Bahamas. Instead, take a weekend trip to a city nearby. Instead of buying an entire new wardrobe, just get one outfit you really like. A good rule of thumb is to spend 80% of the refund wisely and use the remaining 20% to splurge. That way you’ll benefit in the short- and long-term.

Your tax return isn’t a gift from the IRS. It’s money you've been giving to the government all year long. Would you save up $200 a month for a year, then withdraw all $2,400 at one time and blow it? No, you wouldn’t. You’d spend it wisely because saving up that much money is no easy feat. Well, that’s exactly how you should treat your tax refund.

When you’re trying to decide what to do with your refund, think about what you would do with the money if you’d worked hard and saved it up all year long, because that’s exactly what you’ve done.