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To splurge or not to splurge? What to do with your tax refund

To splurge or not to splurge? 

It’s that time of year again.

“April is not the cruelest month,” observes Catherine New for Daily Finance, waxing poetic.  “At least, not when it comes to getting a little extra cash in your pocket.”  But if we’re talking tax refunds, as New sets out to do, then she may have been paraphrasing the wrong dead British poet.  Remember the old line that opens T.S. Eliot’s “The Wasteland”? “April is the cruelest month…” and all that jazz? — Ok, maybe not.  Just us failed writers.

The famous line she had in mind actually came from Shakespeare’s Hamlet: “To be, or not to be? That is the question.”

With tax season, of course, when we’re all getting our tax refund checks from the federal government, the real question is somewhat different.  “To splurge, or not to splurge?” Now that, I think we can all agree, is the question.  And really, New wasn’t so far off.  The title of her article was “Save or Spend,” after all.

Let’s start with what not to do with our tax refunds, according to some of the experts.  MFJ of the blog My Financial Journey urges his readers not to just blow it all on some big-ticket item.  “Why is that when people come across unexpected money that they have to spend it immediately?” he wonders aloud.

The occasion for his piece, he explains, came out of a conversation he’d recently had with a couple he knew.  “[My friend’s] accountant told them that they would be getting a refund,” MFJ recounts.  No sooner had they heard it, however, than “they were busy spending the money before even officially filing their taxes.”  The mere mention of a little extra cash was enough to send them on a spending spree.

MFJ, for his part, was baffled.  “They were going to buy a new computer, a digital camera, PDA, and possibly a new TV,” he writes with astonishment.  “I have no idea what they got for a refund, but my guess is that their expenditures are probably going to outweigh their tax refund.”  In his own financial management, he clearly tends toward frugality.  For him it’s hard to do anything fun with money, opting rather to pay down debt or save for something like retirement. 

CNN Money’s Catherine Clifford shares many of MFJ’s concerns.  “You may have visions of plasma televisions and Hawaiian vacations,” she speculates.  “But with the economy locked in recession and the unemployment rate at a 25-year high, there might be more practical ways to spend the extra cash.”  Unsurprisingly, she advises paying off debts, making long-term investments, or building up emergency funds.  In this, Clifford doesn’t go much further than Laura Coffey did during the housing crisis of early 2008, when she cautioned against succumbing to the frenzy of consumerism that the government was counting on in handing out bigger refund checks.

The recession was real, as it turned out, and we only now seem to be emerging out of it.  Here MFJ might have figured it out best.  He recommends moderation, a happy medium.  Pay off some debt, put some money toward retirement, but then — and only then! — set aside some of the money just for fun.  As he advises, “Do something you normally wouldn’t do and something that you and your family will truly enjoy.” 

Sounds like good advice to me.

Topics: budgeting, taxes, tax season, tax refund


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