My wife and I disagree on how to spend our tax refund
Beth takes on a tricky new money question—and offers expert advice on how to resolve it and how to talk it over in constructive ways.
I just discovered we will be getting a $5,000 tax refund. When I told my wife, she said, “Great! Let’s go to Jamaica.” I said, “That’s enough money to pay for the home reno project we just did.” And there’s our dilemma. My wife thinks it’s really important for us to spend time away from the stresses of our jobs and the kids’ nutty schedules. I don’t disagree, in theory, but we just remodeled our bathroom, which was sporting tiles dating back to 1965. To pay the contractor, we had to borrow money through our HELOC. I understand the importance of chill family time, but to me the best way to reduce stress is to stay out of debt. What do you think?
All across the country this time of year, families are having conversations like this. Roughly eight in 10 taxpayers receive some sort of refund. In 2016, the last year for which full data are available, Americans’ refunds averaged around $3,050. That’s enough money to make a real difference in a family’s budget.
So what’s everyone doing with this money? The National Retail Federation commissions a survey every year to find out, and this year, more people than ever (49%) are planning to put that money in savings, and roughly another third plan to use it to pay down debt. So, Skip, you’re hardly alone. But your wife has company, too. In 12% of households, that money will go toward a vacation, and another 10% will use it on personal splurges, like eating out or buying new clothes.
What you do with your refund is a matter of your family’s values, but sometimes, as you’ve discovered, you and your spouse won’t see eye to eye. No matter what, there are a few important principles to keep in mind when you get that check in the mail, or that deposit in your bank account.
- Ditch the idea that this is “free money.” It’s seductive to think of your refund as a windfall ready for squandering. But bear in mind that this is money you’ve earned over the course of the past year. In fact, a big refund is actually a sign that you should look at the withholdings on the W-4 form you have on file with your employer, because the government is taking too much out of your paychecks. Treat your refund like you would an extra-big paycheck. Odds are you wouldn’t blow the entire thing on frivolous spending. Yet many people convince themselves that it’s free money because of a phenomenon known as “mental accounting,” a concept first described by University of Chicago economist (and Nobel Prize winner) Richard Thaler. If we’re thinking rationally, all the money we make should be the same—none of it is earmarked for specific categories of spending. But we aren’t exactly rational creatures. We tend to label our money depending on where we get it, and to spend accordingly. Tax refunds, which arrive outside of the context of our paychecks, feel like lottery winnings even though they aren’t.
- Don’t double down on your debt—pay it off. If you have high-interest debt, or are planning a purchase that will leave you in hock, put your refund toward paying it off. If you don’t, you’re digging yourself into a deeper hole. And research has shown that heavy amounts of debt (other than a mortgage) take a high toll on our overall sense of well-being. In other words, debt makes us unhappy and stressed out. Your wife is rightly concerned about family relaxation time, but money worries can spoil any vacation memories. If you’re carrying a credit card balance, trying to stay ahead of a payday lender, or paying on a line of credit, your refund needs to go toward eliminating that debt.
- Not having an emergency fund is an emergency. OK, so let’s say you don’t have pressing debts. Are you home-free to blow your refund on a hot tub? I’m heartened by the survey I mentioned earlier—the one that indicates that so many people plan to save their refunds this year. That’s because I also know that other surveys consistently show that many Americans don’t have enough money to cover a $1,000 emergency—an unexpected medical bill, auto repair, broken furnace, etc. The Federal Reserve finds that nearly half of Americans (44%) don’t even have $400 to spare. Without an emergency buffer of any kind, you’re a sitting duck for financial disaster. If you fall into this category, put that refund where you can lay hands on it fast, and don’t touch it until you need it. It will help you sleep better at night—and what better use of money could there be?
Before you run to your wife with my column in your hand to show her that you were right, remember: You did agree in principle that a family vacation isn’t such a bad idea. I suggest you and your wife decide whether a breather from work and school is something your family should do, regardless. Research shows that spending on experiences, as opposed to things, makes us happier. Maybe a spendy week in Jamaica isn’t practical, but is there a cheaper option that’s closer to home? Money is a means to an end, and if that end is a family trip that draws all of you closer together—and doesn’t break the bank—that’s a win-win.