Tax refunds can burn a hole in your pocket

There’s something about a tax refund that just seems to burn a hole in people’s pockets, even though most say they’ll put at least part of the lump sum away in savings.

For many of the country’s working poor, this is the most money they’ll see in their bank accounts all year. It can go fast. In fact, sometimes it’s spent before a check from Uncle Sam even arrives.

Wesley Griggs, co-owner of Furniture Den USA in Nashville, Tenn., says, “Even if people don’t have their tax check, we can still get them their furniture and they have three months to pay it off, same as cash.”

Griggs says 75 percent of his customers at this time of year are spending a tax refund.

Vernon Sherden and his wife fit the bill. The couple are pre-spending their tax refund on a new living room set.

“What it really feels like is we’re getting free money, and you just don’t know what to do with it,” Sherden says. “So you do what comes to mind, and that’s buy furniture, vehicles, take vacations." He adds with a laugh, "You pretty much spend it the fastest way you can.”

Millions of families at the lowest income levels qualify for the Earned Income Tax Credit. Some of them may receive a third of what they make in an entire year and far more than they paid to the Internal Revenue Service throughout the year.

Many companies have come to depend on this time of year and even run special promotions. Auto Masters, a chain of buy-here pay-here used car lots in Nashville, advertises a match for refund checks up to $1,500.

“It may be the one time of year when they do have the revenue for a down payment,” says sales manager Adrian Longoria. “It allows us to hopefully get them in a new car truck or van...pre-owned of course.”

Longoria brushes off questions about whether he’s preying on customers. He sees the tax refund deal as a way to help people find reliable transportation.

A recent study by Harvard University's Kennedy School found only a small amount of tax refunds are spent on splurging.  Sociology professor Kathryn Edin says if big purchases are made, they’re often an investment toward a better life.

"They're very aspirational," says Edin. "They have high hopes. They want to buy a washer and dryer so they can save the time they would spend schlepping the clothes to the laundromat."

According to Edin’s study, about 10 percent of refund money goes into what might be considered binge spending.

At a store in Nashville hawking stereos, subwoofers and chrome wheels, Melissa Cole is buying a sound system for the 2004 Chevy Impala she bought with her tax refund.

The mother of two recently quit her job as a gas station clerk and hopes the car will get her to her next job.

“It’s hard to save up,” she says. “I have two kids. So it’s hard to save up money with bills and kids, so when you get your refund, it’s there.”

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