Millions of Americans have already received or will soon receive a tax refund from the government. Businesses are hopeful that this will provide a needed boost to consumer spending, but an updated survey suggests that many people are not in any rush to go on a shopping spree. Specifically, a National Retail Federation poll found that of the 65 percent of U.S. taxpayers who expect to receive a refund this year, only 22 percent will spend it on everyday expenses. That is down from 25 percent among last year’s refund recipients and one of the lowest readings in the history of this annual survey. Moreover, only 12 percent of respondents expecting a refund plan to use the extra money to pay for a vacation, just 9 percent intend to “splurge” on clothes or leisure activities, and another 9 percent will make a big-ticket purchase.
The majority (50 percent) of refund-receivers will instead add the extra funds to their savings, a sharp increase from 41 percent in 2018 and a new record high. Alternatively, 34 percent of respondents said that they will use their refund to pay down debt. That is encouraging since many older Americans have yet to eliminate all of their financial liabilities. The Federal Reserve’s Survey of Consumer Finances (SCF), for instance, found that more than three-quarters of families with a “near-elderly” (age 55 to 64) head of household held debt in 2016 (most recent data available). A lot of those liabilities can likely be attributed to mortgage debt, but around four in ten (41 percent) near-elderly households were found to still owe money on one or more credit cards. Newer data from Value Penguin similarly found that Americans ages 65 and older on average still carry more than $6,000 in credit card debt, therefore further highlighting the importance of trying to eliminate your revolving debt while you are still working and have a larger income.
It is also worth noting that although it may feel nice to receive a large refund each year, some financial experts consider it an inefficient use of one’s cash flow. For example, rather than giving the IRS an interest-free loan each year, Bankrate's Greg McBride in an earlier analysis recommended the following: “Adjust your paycheck withholding so that extra money lands in your hands every payday instead of Uncle Sam's. But the next step is even more important – use that extra money to increase your 401(k) contributions or have this direct deposited into your IRA. Instead of spending that $50 per biweekly pay period on morning lattes and having nothing to show for it, directing it into your retirement account makes your nest egg $7,600 bigger 30 years from now – and that’s the impact of just one year’s additional contributions. Keep that habit for the next 30 years, and with a 6 percent return, you’re looking at an extra $109,000 in your retirement account.”
Sources: NRF, FRBG, America Saves, Value Penguin, Bankrate
Post author: Charles Couch