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Save or splurge: Where do tax refunds really go?

Even when they have a plan for their refund check from Uncle Sam, Americans often don't realize how they actually spend the windfall.

By MSN Money staff Mar 8, 2014 12:50PM

By Allison Linn, CNBC


CNBC on MSN MoneyWhen it comes to tax refunds, many Americans say they plan to do something virtuous with the money they get back from Uncle Sam, like pay down debt or put it in the rainy day fund.

We're not completely fooling ourselves: Experts say people who plan to save their refund or use it to pay off bills do that — with at least part of the money.


But whether we realize it or not, having a little extra money in the checking account also often leads to a splurge or two, like a new pair of shoes or a nice dinner out.


Image: Dollar bills floating over U.S. Capitol © Corbis"You also find significant spending among households who say they're saving it," said Jonathan Parker, a finance professor at MIT's Sloan School of Management who has studied how people spend money they get back from the government.


It's not clear whether people are aware that they are spending a bit more than they otherwise would have. Parker said people may just see that their bank balance is a bit higher, or know that they just deposited that big check, and feel comfortable spending a bit more even a month or two later.


"It actually caused spending, even though you think you saved it," he said.


For many Americans, a tax refund is a significant financial boost. The Internal Revenue Service said last week that it had issued more than 40 million refunds already this year, and the average refund so far is $3,116.


Many people plan to use those refund checks to get their financial house in order. A survey released this week by financial services firm Edward Jones found that only 8 percent of respondents would spend a tax refund on something fun, like clothes, entertainment or a meal out.


By contrast, 52 percent of those surveyed said that if they were to get a refund this year, they'd spend it on necessary items, like household expenses or credit card debt. Thirty percent planned to save it, and 8 percent planned to invest it; 2 percent weren't sure.


The phone survey of 1,018 Americans was conducted earlier this year and had a margin of error of 3 percentage points.


Parker said if you really want to make sure that you are actually saving your refund, the best thing to do is to put it in a place where it's hard to get to, like a mutual fund account or a retirement plan.


If you just leave it in the checking or even savings account, it's too easy to dip in, even unintentionally, for nonessential expenses.


Still, Parker said there's not necessarily anything wrong with using your tax refund to splurge a bit — after all, an indulgence here and there can make you happy.


It's only a problem if you do something like go on vacation instead of paying that overdue credit card bill, or just end up regretting frittering away the money.


"(If you're) not paying your utility bills, then you ought to be thinking differently," he said.


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VIDEO ON MSN MONEY

37Comments
Mar 15, 2014 6:23AM
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I have had quite a few tax refunds, but never "extra money". In your lifetime there is only so much money we will make, and most of us will have no "extra".  Those who do have "extra" I congratulate you. I have no reason to bash the rich, as I'm happy with my life don't concern myself with what others have or do, for that matter.
Mar 15, 2014 1:53PM
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Does our friggen govt' realize how it spends OUR money ,,money that was OURS,, ..stolen from us, and then wasted on Sh!t!! 
Mar 15, 2014 9:03AM
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I bought me a Sig516, tuned up my truck (timing belts general maintenance, ect), threw in some extra money on my house principle, and still have half to do with what I want.  Was going to get out of town today, go gamble some away, ect..  I'm not rich, but I feel rich.  The only debt I have is my house.  My point is, sometimes we HAVE to splurge.  Why not?  I've never counted on my tax returns to be anything other than "free money" as I see it.  Yes, I know it's not free.  That's the way I look at it though.  I don't depend on it to get through my normal life so when I get a return, it's free money in my eyes.  Free money=Guiltless shopping spree...
Mar 15, 2014 3:34PM
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I got a refund from my state tax return and literally had to give it back to them for fees to renew my drivers license and license plate tabs. It was nearly the identical amount of my refund, so I never seem to see any relief in paying!
Mar 15, 2014 7:33AM
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It always good to get a return,and have some in reserve but it fun to go on a trip,do something you like with the little extra.Money gives pleasure to most. Happy Return
Mar 15, 2014 5:28PM
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The money goes into a large, black hole in Washington.
Mar 15, 2014 8:46PM
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My tax refund is paying about 1/2 for new counter tops in my kitchen.  Money will be all gone, but I will have great counter tops (I hope).
Mar 15, 2014 11:27PM
Mar 15, 2014 2:09PM
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 A better question is why do democrats leech off your tax.
Mar 15, 2014 9:02PM
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Yea, most of us in the Northeast are spending it on heating oil :(
Mar 15, 2014 3:26PM
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Mine will go to this years taxes since state does not allow withholding for IRA accounts
Mar 15, 2014 1:58PM
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$3116 refund?  We get at  most $250 the last few years, saved to pay local property taxes.
Our last refund is this year, as we do not carry healthcare, so it will be harder for us to pay our property tax in 2015, thanks Obozo.  In America today, citizenship has an expiration date, and our is up. You are an American only if someone is trying to make your life better (so they can become re-elected). And don't believe that trying to get affordable healthcare to someone going to bat for you,  its just another plot to buy a voting block, you know that. Its not a free pass, they want to scare you into voting for them to save your healthcare plan.
The trouble with American, we are over-stocked with people who can win at only one game,
"heads I win, tails you lose", in both public office and the work place, in spades galore,  oh wait, am I allowed to say spades? Remember, a successful rat, is just still a rat.

Mar 16, 2014 12:17AM
Mar 15, 2014 11:57PM
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I went out to eat and put the rest in savings haha. But I suppose in the end it will go to a small road trip I'd like to do this summer.
Mar 15, 2014 11:00PM
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We are fortunate to get a few bucks back every year. We pay estimates through the year because we are retired. We let the return roll for next years taxes and pay the estimates as always. It keeps us even at tax time.
Mar 25, 2014 4:03PM
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I place my refund towards the mortgage of my home.  By doing so is projecting to knock off 46 months of my 20 year mortgage without making that monthly sacrifice and hardship versus making extra monthly payments in the traditional sense.  This way, I don't feel the pain and can just pay the minimum while still taking a large bite of my 20 year term with my refund check without feeling it.
Mar 16, 2014 5:38PM
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The Government has a new tax,they ask you what you made and tell you to send it in. Good Days
Mar 15, 2014 5:42PM
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I'm putting mine down on a new 2014 Corvette Stingray, maybe the best sports car to ever come on the market at the price. The way the worlds headed we should all have some fun before the Putin Reich blows everything up.
Mar 15, 2014 5:05PM
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never received one of those even when our kids were home as there was no such thing as earned income credit or all the stuffs people get to lower their taxes. We are retired and still paying taxes. Of course, if it help the country so be it. Good day to American.
Mar 15, 2014 3:36PM
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Those who get those huge $3,000 refunds are WELFARE TRASH AND SCAMMERS WHO LIVE ON DISABILITY AND ALLOW TAX DOLLARS to pay for everything in their lives that the rest of us have to manage on a budget!
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