With April 15 on the horizon, a taxpayer's gaze turns to the refund and how to spend this working person's idea of a financial largesse.
That extra pile of cash is not chump change. According to the Internal Revenue Service, the average 2015 tax refund was $3,120, a figure that should be matched or exceeded this year.
Unfortunately, too many Americans aren't exactly judicious on how they'll manage that tax refund. In fact, there's a good argument to be made that many recipients will squander the money. A 2012 study from Capital One found that 33% of Americans spend all or part of their tax refund.
According to the survey, here are some other ways Americans spend their tax cash:
* 8% use the cash for a vacation.
* 6% buy new clothes.
* 9% make a major purchase, like a new car or big appliance.
* 28% use their tax refunds for "everyday expenses".
* 69% don't factor their tax refund at all into their personal budgets.
There's a second good argument to be made that taxpayers shouldn't be receiving a tax refund at all: it's really not in their best financial interest. If you deduct the proper tax amount from your regular paycheck, you, not Uncle Sam, will have more control of your own money; that way you can collect interest on it if you stash the difference in a bank or investment account. But that tactic is not always employed by average Americans, and as such, the squandered refund issue rears its ugly head.
Financial gurus contacted by TheStreet.com were fairly unanimous that there are better ways to use a tax refund than to spend it on a vacation or a shopping spree. Robert Semrad, a senior partner at DebtStoppers, a bankruptcy law firm in Chicago, Il., advises starting an emergency fund or using the cash to clear credit card debt - both good ideas.
Andrew Poulos, principal of Poulos Accounting & Consulting, Inc. in Atlanta advocates for creating a college savings plan. "Those who are financially responsible can take $3,000 and capitalize on the refund by investing the money into a 529 Plan if they have children and want to plan for their college education," he says.
Poulos also is bullish on using the cash as seed money for investments, thus turning $3,000 into a bigger financial number down the road.
"For example, when a person purchases a home and lives in it for at least two of five years as their primary residence, any gain they have on the sale of the home will be tax free," Poulos says. "For example, if a person uses their $3,000 tax refund to purchase a small starter home of $100,000, and five years later they sell it and profit $30,000 in home equity appreciation, this is a gain they otherwise would not see by investing the money in a certificate of deposit or money market account, or possibly even in the stock market."
Joni Holderman, a professional resume writer and founder of Thrive!Resumes, works regularly with high level professional clients who use some of their tax refunds to invest in a robust, attention-getting resume or other means to land a better job. Sure, it works for Holderman's business, but look at the numbers.
"Think about it: you can get a fabulous professional resume for $1,200 and still have some cash to splurge," she says. "If that helps you attain a new job that pays $10,000 more per year, in a few years, with salary increases and bonuses, that can easily add up to a $50,000 return on your investment. And if it means a career that's more personally fulfilling, that's priceless."
Debra Angilletta, a business strategist working with small business owners, says one tax refund can start you on your road to wealth. And there's no need to be strategic with all of the money; there's some room to treat yourself. Follow the order of these easy steps, she advises:
1. Spend it - take 10% of the tax return and do anything you want with it.
2. Crush it - if you have credit card balances with high variable interest rates, start crushing these. Debt derails you on the road to wealth.
3. Re-allocate it - once debt is paid off, don't stop these payments, re-allocate them into an "opportunity" account - a simple savings account.
4. Multiply it. "Here's where the magic happens," she says. "Use this money to buy assets. Assets increase in value, and generate an income. Invest in real estate, a business, equipment or education and turn it into even more money. A friend used their tax return to pay for an online course (education), fixed up a room in his home (equipment), and got his start on AirBnB (business). He rents out a room in his home that generates an extra $1,500 a month. He turned a $3,000 tax return into an $18,000 a year income stream."
Turning your tax refund into a financial bonanza may seem like a new concept to financial consumers who've blown the money in past years. But it's a great concept to embrace - and 2016 is as good a year as any to turn tax refunds into a solid-gold cash cow.