According to Capital One, 35% of Americans planned to spend at least part of their tax refund last year, with 30% of that number spending their refund on necessities, 23% using it to go on vacation and 15% treating themselves to a new electronic gadget. Since there have been some modest signs of economic recovery over the past year, it is likely that this national trend of spending one’s tax refund will continue this year. This is one national trend that our family refuses to join.
Our family has survived some difficult financial times the past few years: unexpected job loss, catastrophic medical bills, a bit of reckless spending that resulted in thousands of dollars in credit card debt, and exhausting our savings. For the past two years, we’ve made a serious effort to improve our financial footing. We established a budget, we cut back on all of our expenses, and we put the savings towards rebuilding our emergency savings and retirement funds, as well as towards paying off our credit card debt. Now that our finances are improving, I see no reason to go out and celebrate by spending our tax refund.
According to MarketWatch, the average tax refund will be about $3,200 this year, and many Americans will spend all or part of it. This year, our expected Federal tax refund is $1,778. That amount would make a big dent in paying off our household’s remaining credit card debt. According to the same Capital One report listed above, 22% of Americans will use their tax refund for just that – to reduce or pay off their credit card debt. While we’ve done the same in past years, we aren’t going to spend this year’s tax refund in the same way.
To me, it seems wiser to use our tax refund towards rebuilding a savings fund that will contain three months worth of our living expenses.
At first glance, this might not seem to be a wise financial move. After all, it can be difficult to find a savings account that will pay a pitiful 1 to 2% on your savings, and after any special promotional rates have expired, most credit card companies charge anywhere from 10 to 30% interest on the balance that you carry over each month. For some, it might actually pay them to use the refund to pay off their credit cards so that they aren’t being charged such a high interest rate to carry the debt.
As we’ve taken steps to improve our finances by reducing our expenses and debt, the importance of having a savings fund has really hit home for our family. If you don’t have any savings, it’s more difficult to resist the temptation to place unexpected expenses on a credit card, thus perpetuating the cycle of digging yourself deeper in debt and living paycheck to paycheck.
While the nation’s unemployment rate dropped to 6.6% in January, there are still significant challenges to the country’s fragile recovery. There are even signs that hiring may be slowing, as The Labor Department now reports that initial claims for unemployment benefits are rising again. As I learned when I lost my job during the Great Recession, if you carry debt and live paycheck to paycheck without substantial savings you are one job loss away from financial ruin.
So, our family plans to continue following our austere budget, and using the savings to continue to rebuild our retirement savings and pay off our credit card debt. We will use this year’s tax refund to start building our savings to cover up to three months of our living expenses, so that if job loss occurs again, we will be better prepared to deal with this blow without having to return to credit card debt.
Taking the difficult steps to establish a budget and repair our household’s financial footing has been well worth the effort. By reducing our expenses and debt levels, I no longer spend hours lying awake at night wondering how we are going to pay all of our bills each month. This reduction in my stress level is truly priceless. The satisfaction that I now feel is certainly worth more than any temporary rush I might get by spending my tax refund to splurge on a family vacation or new gadget.
