We are entering tax season, so get ready for this dialogue:
Person 1: “Woohoo! I’m getting a huge tax return!”
Person 2: “I don’t know what you’re so excited about, you were just lending that money to the government for free.”
Person 3: “Don’t be mean, that’s how a lot of people are able to save any money.”
Lots of things can be true at once. Person 1 can be right to be excited. Person 2 can be right that Person 1 is an idiot. Person 3 can be right that Person 2 is a jackass. Also Person 3 is an idiot.
Last year, 7/10 people planned to put their tax return in savings or to pay off debt (or as economists call it, “savings”).
Interest rates have been low for the whole of my adult life. When I was a kid, I’d saved up $200 dollars and after a year in the savings account, I had $10 more. For the months leading up to my home purchase, I had tens of thousands of dollars in my savings account, and at the end of a few months, I had $10 more. I got my money working for me!
So was Person 1 missing out on not having money in the savings account? Probably not. But what is the point of even having a savings account? Is it in case of an emergency? Well then they didn’t have that money in there to use. Is it in case some crazy opportunity comes up and they need to have the cash available? Well then they didn’t have it in there for that either. In what world is there a conceivable reason to even have a savings account and there is also a reason to fund it in twelve month intervals? If you aren’t wealthy enough that that $2800 average return is a big deal, then you aren’t wealthy enough that you should lock up $230 in the IRS each month.
38% of surveyed respondents were going to use the return to pay off debt. The average credit card debt was $2000. Waiting until return to pay that off, rather than paying it off month to month with the same money is a couple hundred dollar difference. Is this a large difference? I can’t say, but if you’re excited about $2800, you should probably be excited about an extra $200 as well.
Those that plan on spending the refund on a splurge are probably the most intellectually honest of all of us. They use their regular paychecks as regular money, and treat this perceived windfall as a windfall. Good for you 4K TV guy! As for me, I’m a 1099 guy. I’m going to be very excited about my tax refund and I’m going to put it into savings.
Tax refund survey: