30% of Americans Count on Tax Refunds to Meet Ends Meet. Here's Why That's a Bad Idea

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KEY POINTS

  • Many taxpayers rely on their refunds to cover essential bills.
  • Because refunds aren't guaranteed, it's important to be able to pay your expenses out of your earnings alone.

Now that the 2023 tax-filing deadline is well behind us, a lot of people have already seen their tax refunds hit their checking accounts this year. And if you were waiting on your tax refund to cover some important bills, like your utilities or most recent car payment, you're certainly not alone.

More than 30% of tax-filers said they rely on their refunds to make ends meet, according to a recent survey by No Deposit.Guide. But that's a pretty dangerous pattern to uphold.

Why you shouldn't be reliant on your tax refund

Some people look at their tax refunds as extra money. In reality, your tax refund is your money that you didn't collect as you earned it. 

But the main problem with relying on a tax refund to cover essential bills is that a refund isn't guaranteed. Let's say you just got a $2,400 refund from the IRS. What if next year's refund only amounts to $1,600 due to different factors, whether it's earning more interest on money in your savings account or getting a raise at work? If you're counting on a $2,400 sum to do things like pay your property taxes or cover maintenance for your home, and you end up with $800 less, you might wind up with a big problem on your hands.

Another reason it's not a good idea to rely on a tax refund for essential bills? Your goal should be to collect as small a refund as possible. 

A smaller refund means you're getting more of your money upfront, as it's being earned. That's far more ideal than having to wait months to receive a portion of your income.

It may be time to rethink your budget

It's okay to use your tax refund to pay bills if you so choose. But you shouldn't be reliant on that refund to pay bills. Or, to put it another way, a smaller refund should not put you in a position where your essential expenses aren't payable.

If you're currently dependent on your tax refund to pay for basics, consider it a wake-up call to rethink your budget and spending. Take a look at your expenses and compare what you spend monthly to what you earn. 

Keep in mind that you may be spending more money than you think you are these days due to inflation. But ultimately, you'll want to make sure those numbers line up without factoring in your refund.

So, let's say you bring home $3,200 per monthly paycheck. Your bills should not exceed $3,200 a month. Period. If they do, it's time to cut back on some non-essential spending (for example, cable and restaurant meals) or pick up a side hustle to boost your income if there's truly no expenses you can slash.

Although many tax-filers end up getting a refund every year, it's money you shouldn't be waiting on to cover things like your car payment or grocery bills. If you are, then it's time for a serious budget overhaul. 

Our Research Expert

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