What Americans Really Do with Tax Refunds

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By Allison Linn

When it comes to tax refunds, many Americans say they plan to do something virtuous with the money they get back from Uncle Sam, like pay down debt or put it in the rainy day fund.

We're not completely fooling ourselves: Experts say people who plan to save their refund or use it to pay off bills do that -- with at least part of the money.

But whether we realize it or not, having a little extra money in the checking account also often leads to a splurge or two, like a new pair of shoes or a nice dinner out.

"You also find significant spending among households who say they're saving it," said 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.

It's not clear whether people are aware that they are spending a bit more than they otherwise would have. %VIRTUAL-article-sponsoredlinks%Parker said people may just see that their bank balance is a bit higher, or know that they just deposited that big check, and feel comfortable spending a bit more even a month or two later.

"It actually caused spending even though you think you saved it," he said.

For many Americans, a tax refund is a significant financial boost. The Internal Revenue Service said Thursday that it had issued more than 40 million refunds already this year, and the average refund so far is $3,116.

Many people plan to use those refund checks to get their financial house in order. A survey released this week by financial services firm Edward Jones found that only 8 percent of respondents would spend a tax refund on something fun, like clothes, entertainment or a meal out.

By contrast, 52 percent of those surveyed said that if they were to get a refund this year, they'd spend it on necessary items, like household expenses or credit card debt. Thirty percent planned to save it, and 8 percent planned to invest it; 2 percent weren't sure.

The phone survey of 1,018 Americans was conducted earlier this year and had a margin of error of 3 percentage points.

Parker said if you really want to make sure that you are actually saving your refund, the best thing to do is to put it in a place where it's hard to get to, like a mutual fund account or a retirement plan.

If you just leave it in the checking or even savings account, it's too easy to dip in, even unintentionally, for nonessential expenses.

Still, Parker said there's not necessarily anything wrong with using your tax refund to splurge a bit -- after all, an indulgence here and there can make you happy.

It's only a problem if you do something like go on vacation instead of paying that overdue credit card bill or just end up regretting frittering away the money.

"[If you're] not paying your utility bills, then you ought to be thinking differently," he said.

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What Americans Really Do with Tax Refunds

This is my personal favorite! Think of yourself as a regular monthly bill you have to pay. All you have to do is arrange to have a set amount of money directly deposited from your paycheck into a savings account each month.

I recommend using a separate savings account because if you have access to your funds in your checking account, you're more likely to spend them. Again, it might hurt a bit at first to take home a little less every month, but trust me, after a while you won't even notice it's gone. Here's a moment when the "set it and forget it" strategy works wonders.

It feels great to be rewarded for your hard work. And it feels even better to spend that hard-earned bonus on something you’ll enjoy, like a trip to France or an iPad. At the same time, the pleasure of a vacation or new gadget is short-lived compared to financial security.

So make a pact with yourself to put every bonus you get from here on out to good use. If you direct 90 percent of your bonuses straight into your savings account as a rule, you’ll still have 10 percent to treat yourself with (plus the comfort of knowing that you're building a well-earned safety net). I live by this rule.

OK, OK, this seems like an obvious one -- and easier said than done. Actually, most people spend money on more unnecessary items than they think. So take time to look at where your money is going in detail and begin to cut back. Saving $10 here and there could help you put a lot away in the long run.
Many banks offer seasonal accounts meant to save for holidays like Christmas. These accounts give you reduced access to your accounts, charging a hefty penalty each time you withdraw more than permitted. Since emergencies don't occur often, a seasonal account could make sure you're touching it only when needed (just make sure you're not tempted to blow it all on Christmas gifts).
I love this one. Chalk it up to my massive craving for organization, but I'm all about getting rid of things I no longer use. Rather than throwing these unused goods away, start selling them, and put that money into your emergency fund. All you need to do is post them to a site like eBay or Craigslist or Amazon and you can get rid of items from the comfort of your home. You can also take your clothes to a consignment shop to have them sold for you.
Instead of saving your pennies, put aside any $5 bills that come your way. Never spend a $5 bill again, and you'll be surprised by how quickly this silly trick will help you come up with a few hundred dollars to add to an emergency fund.
You could pick up odd jobs via websites like TaskRabbit.com, DoMyStuff.com, Elance.com, FreelanceSwitch.com or Sitters.com.
If you get a cash-back reward for any spending on your credit card, just make it a rule that those dollars will be dedicated to your freedom fund. It may only add up to $100 extra each year, depending on your spending, but every little bit counts.
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