The IRS issued the first few rounds of refund checks.
I first learned this from a friend who has been in a legal battle with the City of Raleigh who charged (I kid you not) $2400 for water over the course of two months. This isn't late fees, this is just incorrect meter reading. She's decided to give up her fight and simply pay off the city.
I told her to raise Hell with the newpaper and local representatives (in fact, I made some inquiries myself), but found that the complicated relationship between utility companies and Section 8 recipients leaves Section 8 recipients in a vulnerable position. It's risky to raise your voice when you could lose your house because your water or electricity was cut off. She would have to move and may be ineligible for Section 8 for a few few weeks or even months as her appeal made it through some bureacratic process (akin to Dante's 3rd layer of Hell) that I would hope determine that she was not at fault for her utilities being cut off, and then her Section 8 benefits would be restored.
Anyhow, she's a great lady, but she won't be getting ahead this tax season. Maybe out from behind, but not ahead.
I next learned about the refunds when the tenant in our rental house deposited the March rent check early. Last year, she paid her rent early every month until October when she went on disability pay for close to two months. She always came up with the rent money, but it was late. She's back to early payments which is a win for me and for her (she gets a discount if she pays early and pays a fee if its late).
Finally, I learned this when I asked my neighbor about all the new cars in the neighborhood. In my part of town, it's not unusual to see two cars in the driveway that are (or at one time were) worth more than the house. Houses come cheap, and cars are as expensive here as anywhere else, and I've seen quite a few new cars in the neighborhood. My neighbor explained, "It's refund time. But no new car for me this year, I need a new roof like you." To be honest, 70% of the neighborhood needs a new roof.
Some people use their refunds to buy sanity, others to buy financial stability, others to finally enjoy some deferred opportunities and others to bury themselves in debt. However, for low income Americans, tax refund season offers the best possible opportunity to break free from poverty cycles that otherwise threaten to trap even the best money managers of the lower class.
It is the one time of the year, when asking a low income person to think like a rich person is not a demonstration of Trump-like ignorance. And it's the one time of the year that I will encourage lower income Americans to Think Rich!
It's tough to break even on a low income
The median family income (household of 2 or more people) in the United States is $53K. In my area of the country, we are closer to $46K, and in my zip code, we are down to $37K.
Despite the lower earnings, life is not remarkably cheaper* here than in other small cities (*Houses are cheap as dirt here, but rents are not). Sure, a family of 5 without a mortgage can live on $30K per year here, but $30K per year doesn't leave much buffer for emergencies (and that assumes no daycare expenses).
A median income family in my area would need to live on a very tight budget for at least a year or two in order to save 3-6 months worth of expenses in an emergency fund. 10-20% savings rate are tough even for median income folks, much less those earning below the median. So when I say that low income families (and by low I mean anyone below the Median) have an unprecedented shot to achieve financial stability this week, I say it with absolute sincerity.
Tax refund time may be the best (and only) shot that a lower income family has to achieve financial stability this year. It's no guarantee, but if a low income family is looking to get ahead this tax refund season, this is the best advice I can give, "Don't think like the middle class. Instead think like the wealthy."
The middle class isn't a step up (financially speaking)
The middle class in America is essentially a group of the most comfortably broke people ever in the history of the world. Americans are, on average, in debt to the tune of $130K including $15K of credit card debt. The American Middle Class is not getting ahead, and aspiring to be like the American Middle Class is choosing to be comfortably addicted to broke.
If your highest financial aspiration is to be more comfortably broke, then a tax refund won't help you out for long. You can spend it, and be more comfortably broke for a short time before you run out of money.
However, if you are a low income individual who wants to get ahead, and you've got a $3-4K tax refund in hand, you can think like the wealthy. Which is to say, you are going to think strategically about how you can use the money you have now to solve your financial problems.
And this is how I recommend you do it.
How do I use money to make more money?
Although it's generally not bad advice to invest your money in the stock market, that's not how most lower income Americans should be thinking. $3K is not a life changing amount, no matter how long it compounds.
However, $3K is likely to be more than enough to help you increase your income by 10-20% in the next 3 months. How? By thinking strategically.
One of the biggest factors that keeps lower income people from achieving higher incomes is the general instability of poverty.
If you are one of the hard working Americans who earns $10/hr ($19K per year), what is keeping you from earning $13/hr in your day job? Is it lack of access to reliable childcare or reliable transit? How much will it cost to solve that problem? Do you need some additional certification, or the ability to work slightly adjusted hours?
Can money help you solve the problem that's keeping you at $10/hr as opposed to $13/hr?
Perhaps $13/hr isn't achievable at your workplace. Would owning a computer and a reliable internet connection help you search for better work?
Maybe $13/hr jobs are unicorns in your area. In that case, it's time to look to micro-entrepreneurship to help you make more money.
One of my neighbors details cars every evening, and most of the day on Saturday. He has several hundred dollars worth of equipment, but he also makes about $20/hr by detailing cars. Another neighbor drags his lawnmower to a richer part of town to make a little extra money. A lawnmower and some basic lawn care equipments costs about $400 and can pay huge dividends if you hustle enough.
One woman makes plates of fried fish and fried chicken that she sells for $5/plate which is a great business model because the closest fast food is a about 2 miles away, and she lives next to a park where tons of people play.
Maybe you could buy and flip products at Garage sales (another neighbor does this all spring long, and she sells great stuff at low prices!).
Maybe you can develop the skills necessary to be a social media marketer, or a freelance writer.
What skills do you have that could result in a high payoff? Right now, you have the money you need to start a business. You have the money you need to get a raise. Will you do it?
Can I spend money to save it?
If you've started to earn extra income, and you still have some money leftover, then the next best place you can use the money is to spend money to save it.
Low income people don't have much that they can cut out of their budget. I don't advise going line by line trying to figure out where you can save money. Instead, I advise that you spend money to save it.
If you are regularly paying late fees on your utility bills, or you have credit card debt, or you have a payday loan, or an expensive phone plan, or you're paying Rent A Center for anything then you can keep your quality of life at a lower cost. Return that damn Rent A Center fridge and buy a fridge from Craigslist for $125. Rent a truck from Home Depot for $25/hr to pick it up. While you're at it, consider a used washer and dryer too.
Get caught up on your Rent, so you never have to pay a 5% late fee again.
Pay your utility bills, so you don't have a compounding 1% per month fee that never seems to go away.
Payoff a credit card so you no longer have to deal with a minimum payment again.
Buy a new phone, and switch to Republic Wireless and pay $17/month for an everything plan.
Buy a chromebook and return the computer that requires monthly payments.
No, don't try to cut your grocery bill. If you eat out once per month, or buy a few beers, or occaisionally indulge in a new outfit, you're probably fine. Instead, cut the stuff that's adding nothing to your life. Cut fees and interest out of your life forever!
If there's still anything left
Treat Yourself. Or Save it, you'll need the money soon enough.
The key is that you've changed your mindset. You've started to earn more, and you're not wasting your money on financial fees. I don't know if the good times will last. You might get unlucky too early for the compounding effects of this mindset to take root. Thinking rich when you're not is no easy task, but I firmly believe its the only way to escape from poverty and low income cycles.
This is literally the only time of the year that I would ever consider giving financial advice to lower income earners. It's the only time of the year where wealth advice shouldn't come as an insult. If you are looking for an opportunity to better your financial life, take your tax refund and do it, or at least give it your best shot. It won't be easy, but its the only thing that will ever pay off long term.
I'm a wife, a mom, an employee, and a personal finance nerd who is devoted to spreadsheeting my way through life.