1.

broknowrchlatr
April 19th, 2007 at 7:20 am

In concept, you may be right.

There are MANY people who won’t save unless they are made to do so. For them, it initially seems like it is good to get a tax refund. There is an add for a Chase checkign account where whenever you use your debit card it rounds up to the nearest dollar and deposits the difference in your saving account. It is apparent that if this is a good system for anyone, the issue is that it is way too easy to get you to spend a little more than to get you to save on your own.

I think the problem comes at tax refund time. They get a big refund and then spend it on something they don’t need. Perfect example is car dealers offerring those “tax refund anticipation loans” where they calc your taxes and loan you that money for a car until you actually get the money. So, the issue is that the mentality that would tell you to save the refund is the same mentality that tells you it is better to get the money early and save it then. Now, if there were no tax refunds and the government put the money in an IRA for you, that would really help such people.

2.

Nick
April 19th, 2007 at 8:24 am

I think you’re on to something here, broknowrchlatr. But I doubt the federal government would ever go for such a plan because it would likely push more people to adjust their W-4s to avoid a refund. That means fewer interest-free loans.

But yeah, that would solve the negative savings rate of Americans pretty much overnight!

3.

Hazzard
April 19th, 2007 at 10:40 am

I’m afraid my cynical nature has to disagree with you on people saving more by getting it back in a lump sum. My experience has been watching everyone I know look like they won the lottery when they get their refund back. There are very few people that I know that would save the refund. I do agree that people reading PF Blogs are probably the most likely candidates to save the return, but for everyone else, there is just too much *BLING* that they can buy for their Cadillac Escalades.

4.

Nick
April 19th, 2007 at 10:53 am

I didn’t mean to imply that Punny Money readers are more likely to save a refund. In fact, Punny Money readers probably care more about their finances and adjust their W-4s to minimize or avoid a refund in the first place.

I wonder if there are some monthly statistics available on savings account deposits because I bet they would show moderate bumps in savings activity for April (tax refunds) and perhaps December (end-of-year bonuses, though perhaps negated by holiday spending).

5.

Poorer Than You
April 19th, 2007 at 5:53 pm

I’m still on the fence. I saw a family member receive a few thousand dollars in her refund this year. She’s used the money to fix her car (which really needed it), and says the rest goes to debt reduction. But then she goes shopping and buys things saying “I just got my refund, I can afford it.”

I’d rather see her get less back at tax time and set up automatic transfers to her savings over each paycheck. But I guess if she did that, she would no longer qualify as a typical American taxpayer.

6.

Jennifer
April 19th, 2007 at 10:00 pm

Great thought overall. I’ve seen both habits - big spending and saving (or taking care of long-put-off-needs like car repairs). I admit, we get big refunds because we receive Earned Income Credit. Now, we could set it up throughout the year to get Earned Income Credit back but I don’t like the thought of OWING if we didn’t qualify one year! My husband works 2 part-time jobs and goes to graduate school, I stay home with our 3 (soon to be 4) kids. But I know that a better job opportunity could be coming anytime (I can dream right?) or that inherited property could sell and we might not be considered so low-income anymore. I try to look at what we’ve set aside tax wise and what we owe before the big deductions/credits and it’s usually about even. I think that’s what everyone should strive for!!

We usually set part (if not most) of our tax refund aside for savings, it usually helps keep us afloat throughout the year (out of credit card debt!!). It helps when we know a big expense (like baby) is coming.

FYI - for your W4 they give you an amount of deductions (or whatever it’s called) that you can take, we usually subtract 1 or 2 from that. Example - single put 0 deductions (though you could’ve taken one), married put 1 deduction, married with one child put 2 deductions. This approach seemed to work well for us to get some $ back at tax time but not too much.

7.

Hazzard
April 21st, 2007 at 12:35 pm

It would be somewhat fascinating to see savings account trends at certain times of the year. Of course, for every bump in savings account, statistics would probably show that there is a similiar decrease in the following months.

8.

The Sarcasticynic
April 22nd, 2007 at 10:20 am

Nick, I agree that that tired old cliche needs to be dropped. If interested, here’s what I had to say on the topic of interest-free loans to the government. Your comments are welcomed.

Interest-free Loans to the Gov’t

9.

Clever Dude
April 22nd, 2007 at 5:15 pm

Well, since it’s free money, you could use your return for our remodeling efforts, right?

10.

Nick
April 22nd, 2007 at 5:56 pm

Clever Dude,

Sure, if that remodeling includes a tunnel from our house to yours so we can use your pool anytime we like!