People sometimes get the silly notion that a tax refund is a GOOD thing. They think of vacations, cars, new phones, new toys, new gadgets, savings, and more. But, think again!
Many people plan on their refund each year for specific items and treat it like a “savings account.” They LOVE tax time and think a refund is a good thing.
However, a tax refund is NOT a good thing. Let’s delve into this thought pattern a little more and see how many silly mistakes you make when you get an annual tax return.
What is a Tax Return?
A tax return means you over-paid the government in your taxes, and they owe you money. Essentially, you have lent them money from January before to April (or whenever you file your taxes) interest-free. In other words, you’ve thrown away money from interest AND been unable to spend your money for a year or more.
Plus, you’ve given the government an interest-free loan. Why? Because the longer they hold your money, the more interest they make on it. The government charges no interest on refunds!
How Much Did You Lose?
Let’s discuss the interest losses we take on a tax refund. When you consider that a savings account or CD with a modest 1 or 2% interest rate would yield an annual return of $10 or $20 per $1,000 of return, you’ll agree that stuff adds up.
A return of $2,000 would mean losing out $40. If you don’t think that’s a lot, then go ahead and take out $2 (two) $20 bills from your pocket now.
Now throw them in the nearest garbage can and leave them there. Hurts, right?
Or, next time you’re at the bank, get forty $1 bills and as you’re driving to work each day, throw out $1 every day right out the window… 40 days later, let me know how you feel about it!
When we see cash loss, it makes the point drive home. If you wouldn’t throw away cold hard cash, why throw it away in other forms?
Now that we know a little more about what a tax refund is let’s look at some of the ways you can put that money to better use.
Use It to Pay Down Debt
When you have debt, it means you are paying someone else’s interest rates rather than your own. This is a form of slavery. Why work hard to make someone else rich?
If you have debt, your number one goal should be to pay it off as quickly as possible. Use your tax refund to do just that. You’ll be surprised at how much faster you can get rid of your debt when you put extra money towards it.
Start an Emergency Fund
An emergency fund is a money you have saved up for unexpected expenses. This could be a car repair, medical bill, or home repair. When something unexpected comes up, you don’t have to put that expense on a credit card and add to your debt.
You should try to save up to 3-6 months of living expenses, so you know you have a cushion if something happens. Use your tax refund to start your emergency fund.
Investing may seem like a scary prospect, but it isn’t. And, the sooner you start, the better. You are essentially putting your money into a company or fund that will hopefully grow over time when you invest. This means you will make more money on your investment than if you just left it in a savings account.
Use your tax refund to start investing. You can open an account with low minimum investment or even invest in a mutual fund.
What Will You Do with Your Tax Refund This Year?
When you get an annual tax return, it’s crucial to think about what you’re going to do with the money. You could use it to pay down debt, start an emergency fund, or invest in a company or mutual fund.
Hopefully, this article has shown you that a tax refund is not a good thing. It’s money you have lost in interest and cannot use. However, there are ways to put that money to better use.
Finally, we must realize the loss of use associated with the government holding our money hostage until we file a return and then up to 6 weeks after processing payment. That loss compounds annually. So, there is a much greater cost to the interest we “save” on our tax refund than meets the eye.
When it comes to our tax refund, we must remember that it is not a refund at all. It is our money that the government has been holding hostage. We need to start thinking about what we can do with that money to better ourselves financially.
Sure, we can spend it on things that we may not need, but there are also other options. We can invest it in our future by starting or contributing to an IRA or 401k. We can also pay down debt or build up our savings account.
No matter what we decide to do with our refund, we should take some time to think about it. The decision we make could have a significant impact on our future. So, don’t just spend your refund without thinking it through. Spend it wisely!