Getting a Tax Refund? Not a Good Idea
If you are getting a Tax Refund from Uncle Sam this year, here's something to think about...
Ask yourself, "Do you like getting a refund?" If you do, you're looking at this the wrong way.
That refund is money you gave to the government that you didn't have to give them.
Did the government pay you interest on that refund amount? No, they didn't.
But if you had put that money in an interest bearing bank account you would be getting a small amount of interest paid to you.
Interest rates on savings aren't that good right now, so this isn't such a big deal.
But, if you are also carrying a balance on a credit card that charges you 25% interest, that is a big deal.
Rather than loan the money to the government for free, you could have used it to pay down your debt and avoid some interest costs.
So, a refund for $500 might look like a lucky break until you look at it like this:
15.
Effectively you could have paid off $573.
07 of debt on your credit card.
That reduction in debt would mean your current interest charges would be reduced by $11.
94 each month.
Now that you're getting the refund, what are you going to do with it? Some people treat their annual refund check like a savings plan.
Maybe you have plans to use that money to buy clothes, or for some needed work on the car.
Clothing and car maintenance are things that should be planned for in your household budget.
And what if you needed the money before tax time rolled around? If you had saved your money in a savings account, you could have it in an emergency at any time during the year.
Some people treat their annual refund check like lottery winnings, something "extra".
Maybe you were planning on spending your refund for a night on the town.
That says you don't see the refund money as being as precious as the other money you have been scraping together to pay off your bills.
Unless you have savings for an Emergency Fund and have all your debts paid off, you can't afford to simply spend the refund on having a good time.
This brings me back to the thought that maybe getting a tax refund isn't a good idea.
If your income is a predictable routine paycheck, you can adjust your claimed deductions on your payroll calculations to make sure you pay the government "just enough" to cover your taxes due.
This will increase your take-home pay.
Later, when you see how much the increase is, you have two good ways to use the money you had been giving to Uncle Sam.
One use is to put that same amount into a savings account (using automatic deposits from your paycheck).
This savings account can be a growing Emergency Fund, or a college fund for the kids, or even savings for a vacation.
The other use is to pay off debt.
Paying off debt is the best use of this money because it reduces the money you "lose" when you pay interest, and eventually you will pay off your debt.
Then you can put that money into savings.
If you're getting a tax refund this year as in years gone by, quit loaning your money to the government when you can use it better yourself.
Ask your employer how to make an adjustment in the number of claimed dependents used to calculate your tax withholding.
Then use this year's refund to get a head-start on paying down debt, or building your savings, like I described above.
This action can be part of your personal Economic Recovery Act.
Ask yourself, "Do you like getting a refund?" If you do, you're looking at this the wrong way.
That refund is money you gave to the government that you didn't have to give them.
Did the government pay you interest on that refund amount? No, they didn't.
But if you had put that money in an interest bearing bank account you would be getting a small amount of interest paid to you.
Interest rates on savings aren't that good right now, so this isn't such a big deal.
But, if you are also carrying a balance on a credit card that charges you 25% interest, that is a big deal.
Rather than loan the money to the government for free, you could have used it to pay down your debt and avoid some interest costs.
So, a refund for $500 might look like a lucky break until you look at it like this:
Routine payments of $41.If you had instead used that $500 to pay down debt on a credit card charging 25%, you would have avoided interest charges of $73.
66 a month will amount to $499.
92 after one year (12 payments).
If you get a $500 refund, this explains where it came from.
You gave it to the government when you didn't have to during 2009, and now they're giving it back to you.
15.
Effectively you could have paid off $573.
07 of debt on your credit card.
That reduction in debt would mean your current interest charges would be reduced by $11.
94 each month.
Now that you're getting the refund, what are you going to do with it? Some people treat their annual refund check like a savings plan.
Maybe you have plans to use that money to buy clothes, or for some needed work on the car.
Clothing and car maintenance are things that should be planned for in your household budget.
And what if you needed the money before tax time rolled around? If you had saved your money in a savings account, you could have it in an emergency at any time during the year.
Some people treat their annual refund check like lottery winnings, something "extra".
Maybe you were planning on spending your refund for a night on the town.
That says you don't see the refund money as being as precious as the other money you have been scraping together to pay off your bills.
Unless you have savings for an Emergency Fund and have all your debts paid off, you can't afford to simply spend the refund on having a good time.
This brings me back to the thought that maybe getting a tax refund isn't a good idea.
If your income is a predictable routine paycheck, you can adjust your claimed deductions on your payroll calculations to make sure you pay the government "just enough" to cover your taxes due.
This will increase your take-home pay.
Later, when you see how much the increase is, you have two good ways to use the money you had been giving to Uncle Sam.
One use is to put that same amount into a savings account (using automatic deposits from your paycheck).
This savings account can be a growing Emergency Fund, or a college fund for the kids, or even savings for a vacation.
The other use is to pay off debt.
Paying off debt is the best use of this money because it reduces the money you "lose" when you pay interest, and eventually you will pay off your debt.
Then you can put that money into savings.
If you're getting a tax refund this year as in years gone by, quit loaning your money to the government when you can use it better yourself.
Ask your employer how to make an adjustment in the number of claimed dependents used to calculate your tax withholding.
Then use this year's refund to get a head-start on paying down debt, or building your savings, like I described above.
This action can be part of your personal Economic Recovery Act.
