This year, about 85% of American will experience a Sudden Money event in the form of a federal tax refund. If you’re one of them, it behooves you to think ahead to make sure you put that money toward its best purpose—before it lands in your bank account.
The average refund will be about $2,800, and even though 75% of Americans nearing retirement age have less than $30,000 in their retirement accounts, research tells us that some still plan to spend the financial windfall (mostly on vacations and consumer electronics).
As we know from our work with Sudden Money clients, people tend to mentally account for money based on where it came from.
Now, I know that you know that a dollar is a dollar no matter if it’s in your bank account or in your hand.
However, it has been shown that most people treat money differently based on whether it came in the form of their monthly payroll deposit, a Christmas check from their grandparents, or their annual tax refund.
However, this kind of thinking is flawed, so I am here to encourage you to resist…
Here are the 3 biggest tax refund mistakes to avoid:
Don’t Be a Lottery Winner
Don’t relate to this check like anything other than your hard-earned money! You did not win the lottery, you simply loaned the money (interest free, no less!) to Uncle Sam for a year. Spend it in the same conservative way you’d spend your paycheck.
Don’t Be Like Mike (Tyson)
Don’t squander the money. If you’re on track with your savings goals for the year, and have stayed on budget, then do as you will. However, if you’re in debt or off track on your savings, tonight’s big expense is often tomorrow’s big regret. I say, go for the CZ’s and the faux fur, Mike.
Don’t Get Cold Feet
Saving for retirement ain’t necessarily sexy—but don’t let yourself refuse to make the commitment or develop a wandering eye. The extraordinary power of compounding will turn that $3K into $30K and even more if you invest it right and nurture it with patience. Don’t give up on your plan to have this money make a difference in your life over the long-term!
Most people are getting this one right these days, though.
To reaffirm your faith in your fellow Americans, here are some of this year’s National Retail Foundation survey results for the question, “What do you plan to do with your tax refund?”
By far the largest percentage of Amerians expect to save at least some of their tax refund: 43.8%
39.8% will use some of the money to pay down debt
28.7% will pay for everyday expenses
Major purchases, such as a television or new car, are anticipated by 12%
And 11% of Americans intend to enjoy their tax refund with a vacation
Point of interest: The Internal Revenue Service reported in 2012 that it cut checks for $337 billion of tax refunds for tax year 2011. Wow.