5 Costly Mistakes to Avoid With Your Tax Refund – And What to Do Instead
Tax season is here, and for many, that means receiving a tax refund. Whether you view it as a windfall or money that was yours all along, what you do with your tax refund can have a significant impact on your financial future.
While it may be tempting to splurge, smart money decisions today can set you up for long-term financial security. If you're serious about building wealth and planning for retirement, avoid these five common mistakes—and learn how to make the most of your refund instead.
1. Don’t Blow Your Tax Refund on a Vacation
A tropical getaway may sound like the perfect way to reward yourself, but using your tax refund for a vacation is one of the fastest ways to burn through that money with nothing to show for it.
A vacation is a liability, not an asset. It doesn’t generate income or build long-term wealth. While experiences are valuable, a smarter strategy is to invest your refund in something that will grow your money over time.
What to Do Instead
Put it in an investment account: Consider opening or contributing to a brokerage account and letting your money grow in a well-researched investment.
Use it for financial education: Learning how to invest your own money is one of the best long-term moves you can make. Attending an investing workshop or reading financial books can provide the knowledge to turn your refund into real wealth.
2. Don't Buy a New Car
It might be tempting to put your refund toward a new car, but financially, this is one of the worst moves you can make. Cars depreciate rapidly, losing value the moment you drive them off the lot.
Why This Is a Bad Investment
New cars lose 20-30% of their value in the first year.
Monthly payments, insurance, and maintenance add ongoing costs.
You could be using that money to invest and grow wealth instead.
What to Do Instead
If you need a car, buy used: A pre-owned vehicle that is just a few years old can save you thousands while still being reliable.
Invest in your future: Use your tax refund to contribute to your retirement accounts, such as a Roth IRA or 401(k).
3. Don’t Lend It to Friends or Family
Helping out a friend or relative in need may feel like the right thing to do, but loaning money can often damage relationships and put you in a tough financial position.
When you loan money, there’s no guarantee you’ll get it back. If the borrower struggles to repay, you could lose not only your money but also the trust in your relationship.
What to Do Instead
Give wisely: If you truly want to help, consider gifting only what you can afford to lose rather than expecting repayment.
Build your financial foundation first: Before lending money, ensure your own financial health by paying down debt, saving for retirement, and investing wisely.
4. Don't Go On a Shopping Spree
Retail therapy might feel good in the moment, but spending your tax refund on impulse purchases is a quick way to lose financial progress. A new wardrobe, electronics, or luxury items may bring temporary satisfaction, but they won’t help you build long-term security.
What to Do Instead
Pay off high-interest debt: If you have credit card debt, using your refund to pay it down can save you hundreds or thousands in interest.
Save for emergencies: A strong emergency fund (3-6 months of expenses) can prevent you from falling into debt when unexpected costs arise.
5. Do NOT Give Your Money to a Mutual Fund Manager
Many people assume that handing their money over to a mutual fund manager is the safest way to grow wealth. However, the reality is that most fund managers fail to beat the market—and they still charge you fees regardless of performance.
The Problem With Mutual Funds
High fees eat into returns: Many mutual funds charge 1-2% annually, which may seem small but can significantly reduce your long-term wealth.
Underperformance: Studies show that most actively managed funds fail to outperform simple index funds like the S&P 500 (SPY or VOO).
Lack of control: You don’t get to pick the companies you invest in, meaning you may own stocks that don’t align with your values or goals.
What to Do Instead
Learn to invest on your own: By understanding the principles of Rule #1 investing, you can take control of your portfolio and achieve higher returns without paying excessive fees.
Invest in individual companies: Instead of blindly following a fund, invest in great businesses at a discount to maximize long-term gains.
Consider index funds: If you prefer a hands-off approach, low-cost index funds like VOO or QQQ can provide solid returns with minimal fees.
How to Make the Most of Your Tax Refund
Now that you know what not to do with your refund, here are some smart ways to put that money to work:
1. Invest in Your Financial Education
One of the best investments you can make is in yourself. Take the time to learn how to manage your own money, and you’ll never need to rely on financial advisors who underperform.
Start by attending our 3-day investing workshop to learn how to invest wisely and grow your wealth.
2. Open or Contribute to an IRA
A Roth IRA or traditional IRA is a tax-advantaged retirement account that allows your money to grow over time. Investing just a few thousand dollars each year can turn into hundreds of thousands in retirement savings.
3. Build Your Emergency Fund
Having cash set aside for unexpected expenses ensures that you don’t have to go into debt when life throws you a curveball. Aim to save 3-6 months’ worth of expenses.
4. Start a Side Hustle
Use your refund to invest in a side business that can generate passive income. Whether it’s an online business, real estate, or stock investing, building multiple income streams can help you achieve financial freedom faster.
Final Thoughts: Take Control of Your Money
Your tax refund is an opportunity to make a significant impact on your financial future—but only if you use it wisely. Avoid the common traps of spending on vacations, cars, or unnecessary purchases. Instead, invest in your future, eliminate debt, and build long-term wealth.
If you’re ready to take control of your financial future, join our 3-day investing workshop and learn how to build real wealth without relying on mutual funds or fund managers.
