How to make the most of your refund

Marketplace Staff Apr 8, 2011

How to make the most of your refund

Marketplace Staff Apr 8, 2011

Tess Vigeland: There are some of us who actually look forward to tax time. I’m among them. There is only one reason that could be, of course: We’re getting refunds.

Now any good financial smart person would tell you that we’re not being smart. That we should adjust our withholding so we come out even, or perhaps even owe a little at tax time.

Well Kimberly Palmer is a financial smart person. She’s a senior editor and columnist for US News and World Report. But recently she wrote that refunds are GOOD and we should have fun with them! Kimberly welcome to the program.

Kimberly Palmer: Thanks having me Tess.

Vigeland: So what’s this you’re telling us about “go ahead and get that refund!” instead of saving throughout the year. That’s not what we were always told.

Palmer: That’s right. We hear so often that if we’re getting any refund at all, it’s really not a smart move, because it means we’re essentially just giving an interest-free loan to the government. But I actually think it can be useful to have a refund, because if we do adjust our withholding and get a slightly bigger paycheck all year long, it’s so easy just to see that money disappear with the rest of our money, just sort of blend in. But with the refund, we have the chance to really consciously think about what we want to do with that money.

Vigeland: And I think part of that’s behavioral, isn’t it? I mean if you adjust your withholdings so you that you don’t get a refund, are you really going to save it that way anyway, right?

Palmer: That’s a really good point, because I think in theory, we are better off we do adjust our withholding, we’ll get a bigger paycheck. If we’re really organized and on top of things, then we’ll still spend that money or save it exactly the way we want to. But in reality, it just doesn’t work that way because money gets really messy. It easily disappears or gets eaten up by certain needs we have at the time.

Vigeland: Or wants.

Palmer: Needs or wants, exactly. There’s all kinds of temptations. So that’s why this refund approach can actually help people, whether it gives ’em a chance to finally start their emergency fund or maybe pay off a big chunk of debt. So that’s why this refund idea can actually be helpful.

Vigeland: So it’s really forced savings.

Palmer: It’s forced savings. And if you are lucky enough to already be on top of your money and you feel comfortable with how much savings you have, it can be a chance to have a little fun and actually think about splurging in a way that you’ve been really wanting to do for a while.

Vigeland: Well, let’s talk about that. Because not only are we saying, “Hey, you know, it might be alright to get a refund from the IRS,” but we’re also saying, “And you know what, you might want to have a little fun with that money too.

Palmer: That’s right. There’s so much research out there that really sheds light on how spending money can make us happy. And one of the biggest takeaways is that spending money on things that give us pleasurable experiences — whether it’s a family vacation or even a hobby that we really like, or some kind of family activity — that can really boost our happiness levels more than buying something like a household appliance or a new outfit. And so that’s why I think with a refund, we have a chance to think about that and decide how can we spend this money so it makes us happy. Maybe we’ll save some of it, but then spend a little bit to bring us a little bit of extra happiness.

Vigeland: So are we saying, then, that maybe you shouldn’t buy a thing, but you should use that money to go on vacation instead? That would be better?

Palmer: That would be better if you are concerned with your happiness level. So if you want to spend this money, so it gives you a little pick-me-up, you’re better off spending it on something that gives you an experience, something that you’ll remember. Because with material purchases, we are too easily or too quickly just get used to them.

Vigeland: Now, of course, the caveat here is if your finances are in bad shape, of course your refund money should be go to paying down debt, for example.

Palmer: That’s right. If you don’t yet have your emergency savings, of course, we should be aiming to have three months in the bank for emergencies. This is a great time to get that started. And actually, most people say that they will either save this money or use it to pay off debt. And that, of course, is the smartest thing to do if you’re not already on top of that.

Vigeland: Alright, so Kimberly, I have to ask you, first of all, have you done your taxes yet?

Palmer: I have.

Vigeland: And are you getting a refund?

Palmer: Yes, I am very excited I’m getting a refund.

Vigeland: Fantastic. And what are you going to do with your refund?

Palmer: Well, we are going to save most of it, but I have to admit that husband has been so eager to get an iPad. So we are actually buying an iPad.

Vigeland: Wait! That’s not an experience!

Palmer: I know. I’m breaking all these rules, but really, this is my husband’s decision and not mine.

Vigeland: Alright, fair enough. Well, happy tax time to you. Thanks for talking with us.

Palmer: Thank you Tess.

Vigeland: Kimberly Palmer writes about personal finance for US News and World Report. You can find her on Twitter @alphaconsumer.

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