Investing

Saving Your Tax Refund? That Could Be Hurting the Economy

Whether you think of it as “tax season” or “refund season” the time of year is now upon us. This year 66% of Americans are expected to receive tax refunds with a total of over $330 billion heading back to consumers. So how are taxpayers planning on spending that many? Answer: many aren’t.

According to Bloomberg nearly half of those surveyed say they’ll be adding their tax refund to their savings instead of spending it right away. Another 35% say they’ll use the money to pay down debt. Meanwhile only 11% will use their refunds for vacations and 9% will use them for things like cars or televisions.

Although it might sound encouraging that so many consumers are making responsible decisions with their extra money this might actually be bad news for the economy in the short term. That’s because the economy is stimulated when consumers are spending, not saving. However the president of the National Retail Federation (NRF), Matthew Shay, attempted to look on the bright side saying, “money saved is spending potential down the road.” In other words long term economic growth will just have to wait.

Younger Americans are even more likely to stash away their refund money. Of those aged 25 to 34, 52% say they have their refund earmarked for savings while another 45% plan to pay down their debt using the cash. Additionally those between 18 and 24 are even more likely to be saving their refunds with 57% of them stating as much. With the fear generated by the 2008 recession still top of mind as well as the rising financial burden of higher education, it’s not surprising to see younger Americans focusing on paying off debt and/or saving for a rainy day rather than partaking in the instant gratification splurges of years past.

NerdWallet recently conducted a tax refund survey that allowed respondents to check all the responses that were applicable. While this still lead 50% of those surveyed to say they would simply save their refund money, 34% said they’d spend the cash on home improvements, big ticket items, or other “splurges.” This may indicate that the situation isn’t as dire as the NRF numbers would suggest and that many taxpayers will use their refunds in more than one way — including spending that could help spur the economy.

With the number of Americans looking to save their tax refunds on the rise again this year, it’s just another reminder that the economy is still on the road to recovery. Hopefully some of the $330 billion in tax refunds makes its way back into the market sooner rather than later spurring some additional economic growth.