Are you getting a tax refund this year? According to the National Retail Federation, nearly 66 percent of Americans are. That’s too bad.
A tax refund is essentially your money that Uncle Sam has held onto for much of the year — and kept the interest. Ideally, you’ll change your withholding for next year so you keep both your money and any interest you can earn. (Yes, rates are dismal, but anything is better than nothing.)
Still, if you’re getting a refund check from Uncle Sam, the big question is: What will you do with it?
Traditionally, Americans spend their refunds. It’s such a tradition among used-car lots that those auto dealers actually raise prices.
“The price bump in the used vehicle market is created by several factors, but one of them has to do with recently filed consumer tax returns,” says Jonathan Banks, executive analyst for NADA Used Car Guide. “Americans looking to buy their next car now have the needed funds in the form of tax refund checks. Their purchasing actions will continue to drive demand during the remainder of the quarter.”
So here’s my first piece of advice: If you don’t need a used car right now, wait a few months before buying one.
Fortunately, more Americans are doing the right thing with their tax refund: Nothing.
The NRF survey declares, “47 percent of those expecting a refund plan to put the money into savings, the highest percentage in the survey’s history.” That’s probably bad news for the NRF, which represents retailers. However, it’s good news for personal finance counselors like me.
Even NRF’s president and CEO Matthew Shay acknowledges the upside here:
“Americans are thinking of the future, and remaining financially secure is a big part of that. A check from Uncle Sam gives consumers the ability to pay down debt, add a cushion to their savings or splurge on a vacation or big-ticket item.”
When I drilled down on the NRF survey, I found even more encouraging news. It seems younger Americans are behaving better than some of their elders: 53.2 percent of those between the ages of 25 and 34 “plan to tuck away their refunds in savings.” That’s higher than the overall average. Also, 47.6 percent plan to “use their refunds to pay down debt.”
Now for the bad news. Please don’t follow these bad examples: “13 percent say they will splurge on a vacation” and “10.5 percent plan to spend on a major purchase like a television or car.”
I can almost forgive buying a used car with your refund if you really need the transportation for school or work, but a TV set? A vacation? If you’re already in debt, these are the worst decisions you can make. Don’t believe me? Then do this: Make a free call to one of Debt.com’s credit counselors, who will analyze your finances and crunch some hard numbers. Call 1-800-810-0989 now.
Howard Dvorkin is a CPA and chairman of Debt.com, an educational resource for those who want to conquer all forms of debt in their lives.