It is that time of year again – cherry blossoms, April rain showers and tax refunds. If you are in the majority of tax return filers that will be receiving a refund this year, the decision about how to spend it can be a real battle. Here are several reasons why investing that refund in a savings account is a wise decision.
Refunds are not winning lottery tickets
The temptation to treat a refund check like a winning lottery ticket is significant because you are receiving a lump sum of money (the average refund is $3,000) all at one time. It is more realistic, though, to view your refund as a reimbursement of the loan you made to the government for the previous tax year.
What if that same amount of money had been deposited as income into your bank account on a monthly basis over the course of the previous tax year? Would you treat it the same way as the lump sum? By viewing your tax refund as deferred savings being paid back to you, you are more likely to invest it wisely.
Future prosperity is built on the back of delayed gratification
“Chickens coming home to roost” is an expression conveying the idea that present actions can bring negative consequences in the future. By using credit to consume goods and services, you can maintain a higher standard of living in the short run. However, when credit dries up, or you default on a loan, or you are 30 years older and still having to pay off your debt, you may very well wish that you had delayed that gratification until later on. Opening a savings account for a younger family member and using your tax refund as an initial contribution to get him or her started is a great way to teach the importance of minimizing “chickens coming home to roost” consumption on credit and only spending what you have.
Savings will help you get out of debt more quickly
Many personal finance experts encourage consumers who are fighting to get out of debt to make sure they have money saved for an emergency. If an urgent financial need were to arise, and you had an inadequate amount of savings to cover it, you could be forced to incur additional debt. Depositing your tax refund into a savings or checking account could be a great way to ensure that your debt repayment plan continues, uninterrupted, all of the way to the end.
While there are definitely lots of ways to waste your tax refund, hopefully the above ideas will help you see some of the benefits derived from putting it into a savings account and watching it grow.