Surprisingly the IRS has already issued over 31 million refunds in 2014 and the average refund so far is $3200. Despite their best intentions however, the average American finds it quite difficult to save that money.
The fact is, when it comes to tax refunds million Americans plan to do something positive with the money, like pay down their debt or put it in an emergency fund. The active word here is plan, something that is definitely open for interpretation.
What usually happens in most cases is that people end up splurging because they have “extra money” and, while some of it might go to paying off bills or paying down debt, in many cases that money is wasted or used to purchase things that simply aren’t necessary.
Jonathan Parker, a finance professor at MIT’s Sloan School of Management who has studied how people spend money they get back from the government, says that “You also find significant spending among households who say they’re saving it.”
Parker went on to say that, when people see that their bank balances are higher, they feel comfortable spending a little bit more money even if it’s a month or two after their refund has been received. “It actually is lost to spending even though you think you saved it” he said.
While many people plan (there’s that word again) to use their refunds to do something positive financially, a survey by Edward Jones found that 8% of respondents actually use their tax refund for something “fun” like going on vacation, buying new clothes or for entertainment purposes.
The survey also reported that 52% would spend their refund on “necessary items” like credit card debt and household expenses. Another 30% said they planned to save their money, 8% were going to invest it and the final 2% simply weren’t sure what they were going to do with the money.
If you really want to save your refund, Parker advises, the best thing to do is put it somewhere that will make it difficult to get to like a retirement plan or mutual fund account. He says that leaving it in a checking or savings account makes it too easy to “dip into” for nonessential or unintentional expenses. Parker also suggests that it’s not necessarily wrong to use a portion of your tax bill to do something “fun” because, in the end, a little indulgence is good for the soul and can make someone happy.
On the other hand, it is a problem if person does something like go on vacation with that money instead of paying an overdue credit card bill or, instead, are simply spending it on frivolous items If that’s the case, he explained, they really are doing a disservice to themselves and their finances.
As Parker says, “(If you’re) not paying your utility bills, then you ought to be thinking differently.” Statistically speaking, there are more than a few Americans should be listening to, and taking, his advice.