The Impact of Saving our Tax Refunds
As we creep towards this week’s tax deadline, the IRS has been churning out data on average tax refunds already. So far this year, the average tax refund has come in at $2,893 – with 83% of filers having received a refund. That’s a huge infusion of cash landing in the laps of a lot of taxpayers.
As contrary as it may seem, however, receiving a tax refund is NOT a good thing. A tax refund is simply getting your hard-earned money given back to you with 0% interest (actually, a negative return when you factor in inflation erosion). You overpaid your taxes throughout the year and the result was an interest-free loan to Uncle Sam. Your tax refund is you getting your loan back.
The result of this false payday is often tax refund windfall syndrome (coined it) – where taxpayers are handed a huge check that results in new positive cash flow that they normally don’t have – so their first urge is to go out and spend it on a bunch of shit that they don’t need. To “treat”, or “reward” their-self as if they were betting house money.
What if those refunds were treated with wise restraint instead? Refunds are cash that was not counted to live on over the previous year, right? So what if 100% of refunds were (appropriately) funneled directly in to personal savings and left there for good?
It’s hard to get an apples-to-apples comparison when the metrics that are reported vary, but some back of the napkin math paints just how massive of an impact this one simple little act of discipline and restraint could have:
- The median U.S. household income most recently came in at $52,250 (pre-tax).
- The average tax refund for the same year came it an $2,792.
- Take that average refund ($2,792) and divide it by the average household income ($52,250), and you get a refund/income ratio of 5.3% – and higher, if you were to look at income in a post-tax sense (tax refunds are post-tax dollars, of course).
Now, 5.3% does not sound like a lot, until you consider that the average personal savings rate for Americans has hovered below that, at between 4.5% and 5% over the previous year.
In other words, American tax refunds are actually greater than annual personal savings, on average!
If we assume that those refunds are going anywhere but personal savings, the act of diverting them in to personal savings instead could result in more than a doubling of the personal savings rate, to 10%+, on average.
1 check, 1 deposit, double the savings. Your mileage may vary in the results, but the advice stays the same.