How NOT To Spend Your Tax Refund, According To Financial Experts

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The paperwork can be a pain, but after your taxes are filed, you'll (hopefully) be rewarded with an extra chunk of change. And while you should treat yourself to some extent, if you're working toward financial goals — say, building your savings, paying down high-interest balances, or heck, you just want to retire someday — blowing all your cash on a shopping spree is how not to spend your tax refund.

Using your money wisely will take some budgeting and self-control, but on the plus side, you'll avoid an expenditure hangover (also known as buyer's remorse) by not spending every last dollar. Stay tuned, because ahead, two financial experts break down the best and worst things to do once you get your tax refund. From reframing your mindset, to planning for the future, to allowing yourself a little leeway, you'll get tips on how to spend your check smartly, from money gurus who've seen it all.

The good news is, you can have the best of both worlds, as long as you have a plan in place. Make this year's refund go the distance by paying off debt, stashing it in savings, or, if you play your cards right, you could even make it multiply.

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Remember: Your Refund Isn't "Free Money"

First thing's first: While it may feel like a cash prize, your refund isn't "free money"; it's your money that was being held, and now you're getting it back. "The most common mistake that I see is mistaking your tax refund for an unexpected bonus and spending it on something frivolous," Shannon McLay, founder and CEO of The Financial Gym, a financial coaching service, tells The Zoe Report. "We’ve seen people plan vacations, buy expensive purses, or buy a spring wardrobe with refunds." If any of these was your intent, you may want to consider a change of plans.

Spend On Goals, Not (Just) Stuff

In life, "most people have larger financial goals that they’re working towards," McClay points out. "The refund has the potential to help you reach those goals faster." To help practice self-control, she suggests abiding by the old adage and don't spend it all in one place, or spend it right away. "Think about your short-term and long-term goals to understand how your money can best be invested," she advises. "What will spark joy? What brings the best return on investment? What will help move the needle on your goals and help you sleep better at night?" In other words, decide whether better financial security or a new pair of Manolo Blahniks will bring more peace into your life (according to you, not Carrie Bradshaw).

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Be Sure To Budget For Fun

No, you don't have to deprive yourself entirely. If you dedicate a portion of your refund for treating yourself, you can spend it guilt-free and feel good about how you're handling the rest. "Maybe you’re putting 33 percent toward debt, 33 percent toward emergency fund or retirement, and 33 percent toward a nice local vacation or massage or some other treat," says McLay. "This way, you’re spending your tax refund wisely because you’re striving toward your financial goals, but you’re also having some fun, too. You can rearrange the percentages, but doing the hybrid method ensures that some money is going into each bucket of your finances."

Dale Sperling, CMO at Stash, a digital investing tool, shares another "spend-some, save-some" trick. "If you want to buy something, double the cost and put half away for your future self," she recommends. "You’ll have a little fun now, and won’t feel that remorse later." After all, she says, "If you were to consider investing even half of your refund, you’d be putting your money to work for you, rather than spending it all or just leaving it to sit in your bank account, earning a small amount of interest."

Smart Ways To Spend Your Refund

Pay down debt. "Credit card interest rates are high and can cost you a lot in interest over time," explains McLay. "If you can pay off your credit card debt with your tax refund, say 'thank you, next,' to debt. Even if your tax refund can only cover a portion of it, it will help you get out of debt even faster." When it comes to prioritizing, she says to put high-interest balances at the top of the list because the sooner they're paid off, the less you'll spend over time.

Pad your emergency fund. "Emergencies happen to everyone at some point," McLay notes. "There’s no avoiding it, and being financially prepared can make it an annoyance and not a disaster. It’s advised to save three to six months of expenses in your emergency fund." If you've already saved for the unexpected, she suggests stashing any extra cash in a high-yield savings account, and suggests that you "create a separate online savings account for your emergency fund so you’re not tempted to touch it."

Save for retirement. "A recent Stash survey found that men are over 10 percent more likely to be saving for retirement than women, and, in general, over 40 percent of Americans aren’t saving at all," says Sperling. "A tax refund can be a great way to invest in your financial future, rather than short-term expenditures.”

McLay adds, "Depending on the size of your refund, you may be able to max out your Traditional or Roth IRA. You can also look into putting more into your 401(k), too. A tax refund is essentially a windfall of cash, so putting that toward retirement now means paying less later," she reminds.

Diversify your investments. While 401(k)s and IRAs are typically considered the investing priority, if those are covered, your refund may provide you with the cash you need to try investing elsewhere. "Women, in particular, tend to perceive themselves as more risk-averse when it comes to investing, but our data has revealed that, once armed with the right education and tools, they behave identically to men," shares Sperling. "In fact, during volatile times in the market, women tend to keep their cool when men panic. So, even if you’re new to investing, your refund could be a great way to get your feet wet.” Not sure where to start? Seek investment advice from a financial advisor, a robo-advisor, or try your luck with investment apps.

Sperling adds another idea for "investing" in yourself. "Invest in learning a new skill, rather than spending money on new clothes or products. Education—in every sense of the word—is a good use of your cash, and a new skill has the potential to increase your earning power and pay off in a major way over time.”

Save for specific expenses. Saving for a life event like a wedding or a baby? Or, has your car or laptop about to reach its end? "If this is the case, putting your refund toward a big ticket purchase item that you need can help," says McLay. "Eventually, you’ll need a new or new-to-you used car, or laptop, or deposit for rent if you plan on moving."

She continues, "Look into what big ticket items are needed in the future and what other items might need to be replaced in the next year. Having your tax refund may just help you afford some of the items you need but can’t quite afford yet on your own."