After looking at HelloWallet user data, we believe that many people are not well-served by lending money to Uncle Sam all year and collecting it back as a large lump sum.
Every spring, more than 4 in 5 tax filers, or over 100 million families, receive a tax refund from the IRS. These refunds averaged $2,800, totaling $306 billion in 2015. But how is this money spent? What do we do with our refunds?
We looked at HelloWallet user data to investigate spending in the months before and after our users received their 2014 tax refunds. We HelloWallet users enjoyed getting our refunds, and we usually spent them pretty quickly!
Saving our tax refunds is pretty responsible, but it would be even better to receive our income throughout the year. After all, if we kept more of our paychecks throughout the year instead of getting a refund, we'd have extra money in case of emergencies and we could earn a little more through interest or investments.
We spent our refunds on all kinds of things from vacations to dining to clothing. Additionally, many of us used our refunds to catch up on bills or credit card debt.
While paying off debt is good, most of us would be better off getting this money in our regular paychecks so we could have avoided borrowing to begin with or paid off debts sooner.
As with other kinds of spending, we might be better off receiving our money throughout the year and automatically allocating it to a savings account. That way, if we needed the money for something—such as an emergency—we would have it and wouldn't need to borrow while waited for our tax refunds. On the other hand, paying extra taxes is a good way to force us to save, since we had to wait until spring to get our extra payments back.
Tax refunds make us feel rich, encouraging us to increase our standard of living for a brief period of time. But, refunds really just represent overpayments; we would be better served collecting more of our money throughout the year.
After we received our refunds, here is how much we increased our spending in these key categories.