What Tax Refund Really Mean
There are two kinds of people in this world. Those who use their tax refund to take a nice vacation or splurge on something extravagant, and those that catch up on debt or try to bolster their meager savings account.
Tax refunds averaged just under $3,000 last year.
JP Morgan’s research shows this:
People don’t really splurge.
Most Americans say they plan to save their refunds or pay down debt, but surveys show significant numbers use the money just to get by. Only 16 percent stated they’d use their refunds for a special treat.
Refunds let people catch up on medical care.
Also found was that consumers increased their health care spending by 60 percent in the week after receiving tax refunds. Not on existing medical bills, however, but for new and possibly delayed treatments.
Bankruptcies tick up, too.
Chapter 7 bankruptcy filings aren’t cheap. In fact, they cost upward of $1,500, an expense that many can’t afford until their refund kicks in. From 2013 through 2016, Chapter 7 filings in March were 26 percent to 34 percent higher than the monthly average, while April's filings were 15 to 25 percent higher.
Tax returns aren’t windfalls. They’re a lifeline for millions of Americans grappling with unpredictable expenses.
Decide to save
Tax refund time is still a precious opportunity that could allow people to be in a better financial position next year.
Try putting $400 of your refund into savings. This leaves 86% of a typical refund to cover expenses. It might save you a payday loan.
Purely deciding to save before a tax refund arrives can really help. The nonprofit Common Cents Lab found in an experiment with the savings app Digit that asking people in advance how much of their refunds they wanted to put aside increased savings rates by 51 percent. Two other nonprofits, EARN and Commonwealth, used that research to create Savers Win, a program that offers chances for weekly $100 cash prizes for those who pledge to save at least $50 of their refunds. Although anyone can enter, Savers Win is designed to encourage lower-income people to start a savings habit, says Leigh Phillips, EARN's chief executive officer.