Tax Refund: How We Spend Them
Can you think of anything more exciting than getting a tax refund? Well, maybe a few things, but refunds are nice and represent a substantial amount of money for many households. The average refund (for those getting refunds) was around $3,000 in 2017. Most of those are issued within 21 days of the time you efile. If you paper file, don’t hold your breath. Paper filers typically wait an additional 2-4 weeks to receive their refunds. Instead of checking your bank account (or mailbox) each day, you can check your refund status HERE.
How to decide what to do with your tax refund:
Have you thought about what you are going do with your tax refund? Most households have a few competing financial priorities. Recently, I wrote about decisions that minimize regret. This week I read about another great framework for evaluating your options: The 10/10/10 Rule for Tough Decisions. Perhaps you can use this to decide what to do with your tax refund.
The quick summary of the 10/10/10 rule is to think about how you will feel about your spending/investing decision at three different points in time: 10 minutes from now, 10 months from now, and 10 years from now?
Most regrettable decisions give too much power to the present because our present emotions (lust, greed, fear, hunger, etc.) are always in the spotlight. 10/10/10 forces us to imagine a moment 10 months into the future with the same “freshness” we feel in the present. The best decisions are usually the ones we envision still feeling good about in 10 years.
Now back to tax refunds. According to a recent survey by Credit Karma, half of the Americans who expect to receive a refund already know how they are going to spend it. Despite the popular notion that most Americans will go running straight to the shopping mall or auto dealership with their tax checks, more than 2/3rds of taxpayers use their refunds to pay off debt or build up their savings.
Here’s what Americans plan to do with their refund:
Tax Refund plans differ by age:
Millennials seem to be learning from past mistakes. More of them this year than in past years said they planned to use their refunds to pay off debt or bolster savings. Seniors (over age 65) are the most likely age group to spend the money. The most popular purchase with tax refund money is travel. Nearly 20 percent of seniors use their refunds for cruises and seeing places on their bucket list. I say: good for them.
And by income level:
- The lowest income groups (earning $0-$49,999) are more likely to use their refunds to pay off debt.
- Respondents earning $50,000-$149,999 are more likely to put their refunds toward savings.
- Those making $150,000 or more are more likely to use their refunds for vacations or to splurge on other purchases.
Don’t fall for tax refund scams:
I feel compelled to warn my readers about the increasingly common tax scams. Two quick points here:
- The IRS will never call or email you regarding your tax return or refund. If you receive a call from someone claiming to be from the IRS or a debt collection agency regarding your tax refund, hang up immediately: It is a scam.
- If you receive a bogus tax refund, it’s also a scam (click here for more details, as well as what to do).
It’s up to you to put your refund to good use whether it’s $500, $5,000, or considerably more. You can use it to splurge on something you’ve always wanted or invest it in a way that will make you richer in the long run.
And, if you can’t decide which way to go, maybe you should do a little of both. Buy something you’ve been wanting, like a Vitamix or an Apple watch, and stash the rest for a rainy day.
Have a great week and good luck with your taxes.