A Tennessee Tech economist said spending a tax refund immediately can lead to financial trouble if the money is actually an overpayment error or needed for emergency savings.
Tennessee Tech Lecturer of Economics Dr. Chelsea Dowell said residents should view refunds as overpaid taxes rather than free money. She said the key is to prioritize long-term security over short-term purchases.
“If you get surprised by a refund, a refund you weren’t expecting, then it might actually be an error,” Dowell said. “If that’s the case, the government’s going to want that money back.”
Dowell said businesses know consumers receive extra funds during this time and market heavily to attract that spending. She said a refund actually indicates the taxpayer overpaid throughout the year, resulting in a lost opportunity to invest those earnings earlier.
“Try not to get caught up in the marketing gimmicks that you’re going to see coming after you,” Dowell said. “Instead of buying some just-for-fun, maybe new pair of shoes, turn it around and help to build up your emergency fund.”
Dowell said families should have an adequate emergency fund should cover at least three months of essential household expenses. This includes costs such as rent, mortgage payments, transportation, and groceries.
“If you’re worried that there is a recession around the corner and your job is maybe precarious, then you want to make sure that your savings is enough to cover at least three months’ worth of your expenses,” Dowell said.
While using the money to pay down credit card balances is beneficial, Dowell said it acts as a one-time payment that does not address the underlying spending habits creating the debt. She suggested residents consider the refund an investment in their retirement or 401k.
“I would just warn people that there’s a lot of scammers out there who are trying to take advantage of people, especially knowing that tax refunds are coming out,” Dowell said.
Dowell advised residents to verify the identity of anyone asking for personal banking information during tax season.