In last fiscal year 2016, the average individual income tax refund was about $3,050 with exclusion of refunds in categories such as business income taxes, estate and trust income tax, gift tax and employment tax. At the state level, average income tax refunds ranged from a low of $2,300 in Maine to a high of $3,130 in Texas.
Just to recall a tax refund or tax rebate is a refund on taxes when the tax liability is less than the taxes paid. Taxpayers can often get a tax refund on their income tax if the tax they owe is less than the sum of the total amount of the withholding taxes and estimated taxes that they paid, plus the refundable tax credits that they claim. (Tax refunds are money given back at the end of the financial year.)
So if you are one of the millions expecting a tax refund this year, make sure you collect (uncollected refunds average $700) do not rush to buy your temptations but just consider the following four scientific and smartest ways to spend your tax refund that will make you happier
1. Spend the money on someone you love
It has been proven fact scientifically that people who spend money on others are measurably happier than people who spend on themselves. It feels really good to give, and if you give to someone extremely dear to your heartlike your kid, partner, or parents then your fleeting happiness takes on a new life and meaningful.
An exceptional example is the viral story of a single working mother who posted the following explanation of how she chose to spend her $5,600 refund: “Instead of buying my kids the latest Jordans or fancy electronics I paid my rent for the year. I’m a single mom and I do it all buy myself on a minimum wage job. I know that a roof over my kids head is what’s important. My kids don’t want for anything because my priorities are straight. Also this also means I will have that extra 450 a month to do things with my kids.”
By investing in her kids’ well-being, this mom shows that everything that matters about buying happiness. Experiences in this case, the day-to-day experience of housing security are more important than material goods, spending on others beats spending on the self, rare experiences like paying a year’s rent all at once reap greater rewards, and the joy of expectation “that extra 450 a month” pays dividends.
2. Buy something that you wouldn’t normally splurge on
Tax refunds are like birthdays and polite relatives that come but once a year. So consider this as a special treat, and you can use some of your money to buy something that you wouldn’t normally splurge on, it will bring you more enjoyment than a routine purchase. On a cognitive level, it’s sort of like the difference between watching your favorite TV show live as it airs week-by-week versus binge-watching every episode at once. Research shows that taking breaks between episodes (as well as, miraculously, taking commercial breaks during an episode) notably increases the enjoyment of watching the show. In other words, there can be too much of a good thing so don’t spend on something you could buy any day of the week.
3. Give yourself something to look forward to
If delayed gratification can be your friend so thinking about something fun can be as rewarding as actually doing it. Suppose you used your splurge fund to book a weekend trip for three months from now. Not only do you get the enjoyment of experiencing the trip itself and the bonus joy of looking back on it after, but you also get three months of anticipatory planning. Thanks to a phenomenon that behavioral researchers call the “drool factor,” delayed gratification gives you time to build up positive expectations, increasing your overall enjoyment.
4. Buy experiences, not material stuff
You are obviously tempted to venture into thrill of shopping, but for most purchases the emotional high tends to ware off pretty quickly. One case where this is not true: buying experiences out of town trips, concert tickets, spa days, notches on your bucket list and so on. Also investing in savings account compounds your earnings over time and this is shown study after study that investing in an experience compounds your happiness upon future reflection. In one survey, 57% of Americans reported that an experiential purchase made them happier than a material purchases, improving their mood when thinking about it and calling it “money well spent.”
Other ways you can consider is to use your tax fund amount to improve your financial situation, whether that means tackling debt or funding your retirement accounts . Note that science says money can, in fact, buy happiness, it just depends on how you spend it.