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What NOT TO DO With A Tax Refund

March 29, 2011 · 34 comments

in Personal Finance

I was watching a local news show recently, and there was a ‘money’ segment.  The subject was what Americans should do with their tax refund, and the segment featured an interview with a ‘financial expert’.

The ‘expert’ did give some good advice, especially reminding people that when you get a tax refund, what you have really done is given the government an interest-free loan over the past year.   Where he and I disagree is regarding what he suggests people do with their tax refund.  His advice is as follows:

  1. Invest 1/3
  2. Pay down debts using 1/3
  3. Have fun with the remaining 1/3

Yes, he suggested you just take one third of that money and blow it.  He actually said ‘you deserve it, you saved that money’.


Sorry, but I totally disagree with that philosophy.

I am all for enjoying life, but rewarding yourself for ‘saving’ makes no sense to me.  (Some may say not managing your tax situation properly instead of saving…)  Does that mean that every December I should withdraw a third of what I have saved over the past year and just go on a wild spending spree?  (Merry Christmas everyone!)

Instead of spending 1/3 of the money hedonistically, I recommend saving or reducing debt with at least 90 percent of the refund, and maybe buying something special with the other ten percent.  (Unless you are already debt-free.  If that is the case, then I will permit a greater percentage for frivolous spending.)   Advising people to just go have fun with a sizable amount of money can be a really bad idea for those that have credit card debt or do not have much in savings.  As a matter of fact, being told by a financial expert to go spending extra money may be exactly what overspenders want to hear to justify their spending habits.  I would expect this type of advice from Best Buy or Delta Airlines, but not from a financial expert.

I understand that life needs to be lived, and that people need to balance happiness with responsibility.  However, considering the IRS is estimating the average tax refund to be approximately $3,000 for 2011, telling people to go spend $1,000 on fun is irresponsible, especially in this economy.  On the flip side, if people invested $900 of that $1,000 every year for 30 years, they would have almost $102,000 at the end of 30 years.   (Assuming an 8 percent interest rate.)  I know I would personally have the extra 100k.

What do you think?  Am I just a middle-aged curmudgeon that needs to relax a bit?

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{ 34 comments… read them below or add one }

Dave @ Money In The 20s March 29, 2011 at 6:28 am

I think you are right on with this. I don’t know that this guy should be considered a financial expert if he is giving that kind of advice!


Kris March 29, 2011 at 9:28 am

Maybe anyone can be considered a financial expert these days? I was so shocked he was recommending a spending spree when so many people are in really bad financial shape in our area. Dummy.


Niki March 29, 2011 at 7:14 am

Completely with you on this. Just perpetuating the myth that we have to spend money to be happy. Not to mention the idea that we “deserve” it, part of the reason people get into such a debt mess is because of this idea that they deserve it, without actually working for it.


Kris March 29, 2011 at 9:27 am

Niki- the ‘deserve it’ part made me the angriest. It was ludicrous.


Nicole March 29, 2011 at 7:36 am

I think the main problem with not letting people have fun with some of the money is that they will then “pre-spend” it, which can get them into all sorts of trouble, especially if they don’t get as high a return as they were expecting.

Personally I don’t believe you have any money to have fun if you have high interest debt and no savings, but that attitude is unusual.

Our tax return: $1300 is going to the emergency room to get a bead out of a nose. Getting the high deductible insurance really just tempts fate.


Kris March 29, 2011 at 9:26 am

Nicole- you are not kidding about the high deductible insurance. This is our first year signing up for it and I already owe thousands too. I think my deductible is $3,000, which won’t take long to hit. A bead out of a nose though? Ugh!

I am all for having a little fun. However, 33 percent fun is too much for me!


Moneycone March 29, 2011 at 7:59 am

Maybe he wanted to ‘stimulate the economy’ – with your money! 🙂


Kris March 29, 2011 at 9:24 am

Moneycone – the money multiplier is what popped into my head too. I was so mad when I was watching that little interview.


101 Centavos March 29, 2011 at 8:09 am

Well, no refund problems for us, we actually owe money this year.

But this “financial investor” needs some virtual tar and feathering…


Kris March 29, 2011 at 9:23 am

101 – I think the Expert works in the city I live in, so maybe I could tar and feather him at lunchtime in person?


101 Centavos March 30, 2011 at 1:27 am

Capital idea! And after the tar and feathering, ride him out of town on a rail.


Jacq March 29, 2011 at 9:44 am

I have a few friends that get tax refunds every year where ONLY spending 1/3 of it would be a step up from what they’re currently doing now (ie. spending it all). If that’s the audience he’s talking to, then they *might* be better off listening.

If we consider that most PF bloggers are a self-selecting group of fairly conservative people with money – and likely many of the people that read them are as well, we tend to be blind to all of those people who are NOT that way (ie. 90% of the population). Which is why we look at those net worth actual accumulations and think – wow, that’s low – but that’s average. He’s speaking to the average person, who really is a dolt with money and really does spend their tax refund like “woohoo! We won the lottery! Mama needs a new pair of shoes! (Or ten… or a boat… or…)


Kris March 29, 2011 at 9:59 am

Jacq- I guess I was being idealistic and thinking that if he said a lower number like 10 percent, he might actually get people thinking that they need to rethink how they handle their money. You are right though, I am sure my perception is different than the average bear’s.

Good points.


Kathryn C March 29, 2011 at 10:14 am

Hi There! got here by way of Budgeting in the Fun Stuff!

Honestly, if it’s something like credit card debt I say use 100% of it to pay off that. I just wrote something on tax refund, but not knowing who is in debt and who isn’t, I basically say the first step is for people to just *stop getting the large refund.*……Next step is to figure out what to do with that extra $250 per month in your paycheck.

People shouldn’t even be getting that large of a tax return as far as I’m concerned, especially if they have credit card debt they could make some adjustments and get more money back each month…. and sounds like the advisor didn’t even get into that which is a bit odd.
Glad I found you!


Crystal @ BFS March 29, 2011 at 3:02 pm

Glad you found Kris through BFS! She’s awesome!


DoNotWait March 29, 2011 at 10:25 am

I agree with you Kris! Unless you debts are all paid, this money is an opportunity to save a lot of interest pretty easily.


Barb Friedberg March 29, 2011 at 10:31 am

All I can say is what a moron. That is the worst blanket advice. If you have credit card debt, put is ALL towards getting rid of the debt. Otherwise, put it all into savings/investing. Unless of course you’re filthy rich, then, who cares!


Miss T @ Prairie Eco-Thrifter March 29, 2011 at 3:11 pm

I agree. The advice is missing context as to when it would be appropriate to do that. Like Barb said, only when you are filthy rich, but even then, I think I would want to use my money for the greater good.


Kayla March 29, 2011 at 11:32 am

I completely agree with you on this. I have to say my eyes widened when I read what the financial expert had said. Spending money on yourself when you have debts to pay is irresponsible, and could lead you into more debt.


Deidre March 29, 2011 at 11:49 am

Great post as always Kris! I’m traveling so have not been able to read as much as I have wanted 🙂

When I was a w-4 employeed I rarely, if ever, got a tax refund so I would’nt even know what that feels like. If I did get one I would probably feel compelled to put it away for a rainy day and maybe buy one nice thing that I needed anyway. Buying luxury items (or just blowing it on more Starbucks) with a tax refund is a bit questionable in my opinion and it’s interesting to note that so called ‘experts’ advocate this!


Squirrelers March 29, 2011 at 12:44 pm

Well, if you’re a “middle-aged curmudgeon” for having your opinion then I’m one too!

The money should be used to pay off obligations and save for retirement – which is an obligation of another type. Why would anyone let unpaid debts accrue interest while instead spending the money on “fun”.

Maybe his advice is based on the reality that many other viewers who are clueless about personal finance would just go spend all of it – and maybe this is a good baby step for them, so to speak. Still, it’s best to take care of needs first. Obviously.

Fun is important, but an adult should behave like an adult. Bottom line: I agree with you on this.


krantcents March 29, 2011 at 1:11 pm

I suggest to reduce your refund to a couple hundred dollars, so you can use most of your money during the year. If you don’t have debt, you should save it.


Jenna March 29, 2011 at 2:39 pm

I think if you’re happy with your investments and have no debt it would be fun to spend money on something worthwhile. Home improvement projects, saving towards a family vacation, investing in a hobby, etc.


Crystal @ BFS March 29, 2011 at 3:00 pm

Woot! I’m following this guy’s advice and blowing 1/3!!! Now where oh where should I spend my $4.34… 😉

What a doofus…no, Kris, you are not a curmudgeon…you simply think that people shouldn’t “reward” themselves by wasting money they earned on stuff they don’t need. Seems smart to me!


Linda March 29, 2011 at 5:21 pm

I’m getting a pretty good tax refund this year: a bit above that average figure quoted. It’s sometimes hard to accurately figure out how much to withhold when you have outside sources of income. (I rent out spare bedrooms in my house.) I’d like to do something else with the money than just park it in savings and I have no consumer debt so I may be doing research into investing (a tricky thing with my current job which has SEC restrictions for investing) or I could just throw it all at the mortgage, I guess.

A few months ago I was shocked when my sister — who I’ve thought of as a highly successful and smart person — admitted that she purposefully did not adjust her withholding to get the money back throughout the year. She said she knew she wouldn’t save the money if she did that, so she looked forward to the big refund as “bonus” savings that she could use for vacation, etc. Yikes! It sounds like not only does she not have savings *at all* but she then spends the tax refund for vacation?!?! After that revelation it wasn’t very surprising when she told me she also has not been contributing to the company-matched 401(k); she’s only lost 14 years of retirement savings…ugh!

I guess she’s more “the norm” than most of us, though. 🙁


Kaycee March 29, 2011 at 8:52 pm

I had read/heard elsewhere that you should allot 10% of your tax refund for splurge money. Makes far more sense than 33%.


Keith Dennis March 30, 2011 at 6:27 am

I agree with you! I see tax refunds as a mistake on my part. Maybe I wouldn’t if the IRA had to pay us interest for the money they borrowed! Because you know that we have to pay them interest if we don’t pay on time.

IF you manage your own tax situation right you shouldn’t have a refund. But in the case where someone does. I usually recommend paying down debt as extra principal payments or if a person does not have an adequate emergency fund then to put it into that account.



MoneyIsTheRoot March 30, 2011 at 8:20 am

Quite honestly, if we are speaking in terms of credit card debt, then I would say 100% of it needs to be applied to that debt. If we are talking about mortgage and student loan debt, then I say to invest in dividend stocks, or savings.


Sandy H @ Journey To Our Home March 30, 2011 at 7:11 pm

I can’t believe the advice of this financial expert. But my brother-in-laws both blow their tax refunds. I don’t understand. I am putting a portion of ours to pay off our debt and the other part in our House Account.


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Little House April 3, 2011 at 1:58 pm

I agree with your advice; save 90% and spend 10% on fun. The fact that people are getting a large refund back means they’ve missed on on earning any interest on that money for an entire year. I think people forget that part of the equation.


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Dave June 16, 2011 at 5:44 am

It’s tax refund season. If you are currently in a bankruptcy, you should not spend your tax refund before talking to your lawyer! Otherwise the court may deny or revoke your discharge. That is a double-whammy — you’ll have a bankruptcy on your credit report but not wipe out the debts!


Kris June 16, 2011 at 4:31 pm

Good point Dave. However, many people in bankruptcy probably don’t want the government to ‘get their money’, so they think spending will let them ‘keep’ their money.


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