I ran into an all too common situation this week. I stopped by a friend’s house, and as I pulled in the driveway, I noticed boxes and old furniture by the curb. As I walked up to the door, he exited, carrying a dresser. I found it odd that he never mentioned he was moving, but my assumptions were all wrong.
It was tax refund day and the old stuff had to go. I walked into his house, complete with a brand-new LCD TV, leather couch, bedroom set, and even a pair of new shoes. He explained that he got the break he needed and used his tax refund to jumpstart his life. He had been having a tough time with finances lately, and the refund seemed to be the answer to his problems.
He used the remaining money after buying the furniture, shoes, and TV was for a down payment on a used Ford Expedition. The whole situation annoyed me more than it probably should have. I spend so much time in the financial independence mindset that there were red flags and alarms going off in my head all through dinner. There was nothing I could say or do. He was happy, and some people mistake bad financial decisions for lucky breaks.
Why Should You Avoid Going on a Refund Shopping Spree
I want to discuss some of the issues with this refund shopping spree by breaking apart the opportunity cost of the situation.
To start the educational rant, my friend was in financial trouble to begin with. While he considered his refund a jumpstart on life, he purchased items that do not even come close to being considered “assets,” at least by my definition.
The furniture he had was in decent shape and he could have even sold it on craigslist instead of dragging it to the curb. The new furniture is now only worth half as much as he paid for it because used furniture does not hold value. The SUV will only worsen his financial circumstances. He now has a higher car payment and a larger fuel bill. It may be a “jumpstart,” but it is without a doubt a jumpstart in the middle of a thunderstorm.
The Best Way Look at Your Tax Refunds
On another note, people should not look at their tax refunds favorably. This is your money that you overpaid to the IRS over the previous year. In its simplest form, this is an interest-free loan to the government that you had to ask for back. You should recognize that your refund is not an end of the year bonus. It has always been your money – you just haven’t been able to touch it.
Now, let’s get to the numbers. According to the IRS, the average tax refund is around $3,000. This is a nice chunk of change rolling into bank accounts all over the United States. With some rounding, the average wage for an American is $46,000. This paycheck is roughly 6.5 percent of their annual compensation.
Instead of building financial security with this money, many Americans take this as an opportunity to only add more instability. Tax refund down payments on furniture and cars are all too common, waiting for the next person to take the bait of many years of monthly payments.
With some rough calculations, let me show the good that can happen when you use your tax refunds in a financially healthy way. If you were to invest just the average $3,000 tax refund every year, without adding any other contributions, you would have $600,000 in 40 years.
Case closed. Changing your attitude on tax refunds could change your life – for the better.