Tax time: that interesting time of year when ordinarily smart people begin to make really dumb financial decisions. Isn't it amazing to watch what a little extra cash (well, for some, a lot of extra cash) lining the pockets can do? The average tax refund in 2015 was $3,539, and I suspect there are at least that many dumb ways to spend it. Here are my top five.
ACT LIKE IT'S FREE MONEY
The operative word in the term "tax refund" is "refund"! Common synonyms for refund are "repayment," "reimbursement" and "return of overpayment." This means that tax refunds are not free money. The government is not giving you a bonus every year just to thank you for being an American. This is money that you've allowed the government to borrow from you all year long. And now, unlike most of your friends or family members would, it is actually paying you back.
Nevermind the fact that you made the loan with no interest even though you pay the government back with interest on your student loans or installment payments.
Smart Move: If you routinely get a big tax refund, change your withholding?(use the IRS calculator to determine the amount you should be having withheld and how to change it). Your goal is to neither owe or be owed at the end of the year. If you can come within $100 of that goal, you're good.
PAY DOWN DEBT
Before you do that — noble as it may be — you need an emergency fund. If you are not able to fund your own emergencies, you'll never get out of debt because you will keep running back to the credit cards for a bailout.
Smart Move: Keep making your regular debt payments, and use the refund to establish your contingency fund. Keep adding to it until you reach your goal (enough to live for at least three months without a paycheck, or $10,000). Now you'll be in a beautiful position to rapidly pay down your debt and keep going when life happens.
MAKE A DOWN PAYMENT
Make a down payment on a car, television, piece of furniture or any other thing for which you will incur new monthly payments, or debt.
The burning sensation and feeling of prosperity and richness strong-arms people into putting money down on a new car, boat, Disney vacation or what have you. Here's the thing to remember: After that down payment, you're still responsible for the pesky monthly payments, which stick around much longer.
Even though you're feeling good right now, remember that April 15 comes but once a year. The joy of getting back your tax overpayment can quickly turn into a nightmare if you're not careful.
Smart Move: Use the refund to abolish your bills, not create new ones. Never create ongoing debt with one-time funds.
INDULGE IN A LITTLE RETAIL THERAPY
There's no doubt that shopping for new clothes, shoes, electronics or other cool things is a great anti-depressant, but it's dumb. Once that shopper's high wears off, you'll be right back where you were: broke but with more stuff.
Smart Move: Go for a brisk walk; spend time with your kids, friends and family doing things that won't cost money. Almost every city has a big museum or zoo that's free one day each month. Or go on a picnic; take a bike ride; explore your own city by Googling the name of your city plus the word "tourist." Go to Free-Attractions.com to find all kinds of things to do for free. You'll be amazed. And you'll feel a lot better.
CRAM IT UNDER THE MATTRESS
It's an idea but not a very good one. Money under the mattress is not earning any interest. It's vulnerable to theft and fire. But, most of all, it's vulnerable to you in a weak moment.
Smart Move: Open an online savings account at SmartyPig.com or Ally.com. Deposit your tax refund, and then sit back and know it's safe from you and growing at the same time.
If you lose your job or have a true financial emergency, you'll be plenty glad you got smart with this year's tax refund.
Mary invites questions, comments and tips at [email protected], or c/o Everyday Cheapskate, 12340 Seal Beach Blvd., Suite B-416, Seal Beach, CA 90740. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of www.DebtProofLiving.com, a personal finance member website and the author of "Debt-Proof Living," released in 2014. To find out more about Mary and read her past columns, please visit the Creators Syndicate webpage at www.creators.com.