Huffpost Money

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Ishani Banerji, Ph.D. Headshot

Wondering What to Do With That Tax Refund?

Posted: Updated:
Pgiam via Getty Images

A few weeks ago the refund from my federal tax return was deposited into my bank account. I had two reactions, almost simultaneously. The first was, "Woo-hoo! Fun times!" The second was, "I should probably save this. Be responsible."

I'd like to think that I'm not alone in my indecisiveness on this issue. After all, tax season is one of those times when a lot of people get money from the federal government. Of course, the amount might vary, with some people getting a sizable check and others getting little. Nevertheless, it's a little pick-me-up for most of us. The sun is finally starting to shine. Trees are blooming. And, hey, here's some money!

As someone who studies psychology and consumer behavior, tax season is also a great research opportunity. It raises all sorts of questions, such as why people file when they do, whether they lie on their returns, and, most relevant to my quandary, how people are planning to spend their refund. I got answers to these questions from a survey we conducted at the Georgetown Institute for Consumer Research.

Is Getting a Big Refund Like Winning the Lottery?

There seems to be a general belief around this time of the year that if you're getting a refund, then you should spend it on something fun. All the ads urging us to go out and splurge certainly seem to think so. But is that really the case?

Not quite. In fact, consumers seem to view the refund as money they have been counting on. In the survey conducted by the Institute, 54 percent of respondents said they viewed the refund as money they were owed, or as a self-imposed savings account. In other words, consumers don't view the refund as a surprise gift from the federal government that they could party with. Instead, this is money that many consumers have already allocated toward something. Given this perception of the refund, the big question becomes what people are planning to spend their refund on.

Where Is the Refund Going?

For most tax payers, it's been a tough few years. Though the recession began six years ago, the effects are still being felt by most people. Consequently, it's not surprising that most survey respondents wanted to use the bulk of their refund (84 percent of it, on average) in a responsible manner (e.g., by saving, investing, paying down debt, or making a necessary purchase). But surely some people are planning to use some of their refund for something fun? Surely I'm not the only one who wanted to use some of my refund to indulge myself?

Indeed, I'm not alone. While a large portion of the refund is going to be spent responsibly, consumers are planning to use a small portion for something fun. In fact, about 12 percent of the refund, on average, is being allocated for an extravagance. However, some consumers plan to use more of their refund in this way than others. There were two factors in particular that influenced the extent to which the refund would be used to make an extravagant purchase.

One of the factors is family structure. Consumers without children are planning to devote more of their refund (14 percent, on average) toward a nonessential purchase than those with children (9 percent, on average). This is understandable given that those with children are likely to have more financial burdens than those without children.

The other factor that determines how much of the refund is allocated toward an extravagance is the amount of the refund. Who do you think will spend more of their refund in this way: those who are getting a relatively big refund (at least $3,000), or those who are getting a small refund (less than $3,000)? I predicted that those getting a big refund would be the ones spending more of it on an extravagance. However, the data tell a different story.

In fact, it was the people getting more money who were less likely to splurge. Among those who are getting a relatively large refund, only 9 percent were planning to use at least some of it for purchasing a treat. However, among those expecting a relatively small refund, 35 percent were planning to use some of their refund on an extravagance. Doesn't that seem a little crazy to you? After all, if you're getting a bigger refund, you should be more willing to splurge a little, right? This might be the case, but I realized that it's also possible that those getting a small refund think it won't be enough to make a dent in their financial obligations. Consequently, these consumers might conclude that it's better to spend more of their refund on something nonessential.

Problem Solved

So if you've been wondering what to do with that refund money lying in your bank account, then you could go along with what most consumers are planning to do. Use the majority of it in a responsible manner, and take a small chunk to celebrate.

Check out our full Tax Refund Report here.

Have a question about consumer behavior that you'd like answered? Click here to submit your question. We at the Georgetown Institute for Consumer Research will contact you if your question gets selected!

Top 8 Financial Worries Of Americans
Share this
Current Slide