Will rotten economy convince folks to save tax refunds?

Medill News ServiceApril 5, 2010 

WASHINGTON — After more than a year, Cary Chan finally got that big check from the Internal Revenue Service.

"I've been thinking about it since March 2009," Chan said.

The 25-year-old purchased his first home in the Lincoln Park neighborhood of Chicago in March of last year and is planning to spend his $8,000 refund from Uncle Sam on home repairs and new furniture.

Chan stands out as an anomaly among Americans, 30 percent of whom plan to use their refunds to pay down debt, according to a poll commissioned by Bankrate.com, which specializes in financial data, and released Monday. Also in that poll, 28 percent said they'd save or invest what they got from their returns and 7 percent will treat themselves with vacations or shopping sprees.

Since you're getting a tax refund, though, it's OK to buy that shiny new iPad, right?

Think again. Financial planners are warning people to resist the temptation to buy new trinkets.

Pat Seaman, a spokeswoman for the National Endowment for Financial Education, stressed that people should not view their refunds as windfalls.

"Take that moment and recognize this is money you made at your job; the same money to pay rent and credit cards," she said. "It's your money. It's not a free gift that you should go out and spend on toys."

If people think of their refunds as free money as opposed to money from their paychecks, they're likely to splurge, Seaman said.

With the average tax refund at $3,000 and 70 percent of Americans expecting one, "You could be looking at a fair amount of money to make decisions," Seaman said.

It's likely that Americans have been more reliant on credit cards in the tough economic climate and thus might have racked up high-interest debt, Seaman said. If you get a refund this year, apply as much of it as possible toward paying down your credit-card balance.

Liz Malone, 34, a Washington lawyer, said she had only one plan for her tax return: saving it.

"That's the general policy," she said. "Don't count on getting it, but if you have it, save it."

Financial planning experts agree that's a good mentality to have.

"Many Americans are underprepared for retirement," said Christine Benz, the director of personal finance at Morningstar Inc., which provides information about investing. Benz said the refunds allowed people to start retirement savings accounts, but that Americans also should make a habit of contributing as much as they could regularly.

"Getting started early with even a small part of the refund can make a big difference," Benz added.

People also should take a look at their emergency funds. If they fall short of three to six months' worth of living expenses, they should contribute more to it, Benz and Seaman said.

"One of the biggest mistakes would be to spend everything all at once on a nonessential," Benz said. "If you need a car, spending money on a car is a legitimate use of money. Vacation is probably not a must-have."

If you've taken care of your obligations, then you can enjoy a guilt-free trip to the mall, but before then, take a look at your priorities to see where that refund should go.

(The Medill News Service is a Washington program of the Medill School of Journalism at Northwestern University. Truong, a graduate student in journalism from San Gabriel, Calif., covers business.)

MORE FROM MCCLATCHY

To ask a question about this story or any economic question, go to McClatchy's economy Q&A

Where was Moody's board when top-rated bonds blew up?

What's driving up oil prices again? Wall Street, of course

Not satisfied with U.S. history, some conservatives are rewriting it

McClatchy Newspapers 2010

McClatchy Washington Bureau is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service