Considering the opportunities you’d have for growing wealth by keeping more money throughout the year and investing it, is there ever a time when it would be okay to get a big tax refund? Maybe. Consider the following scenarios....
The following post is by MPFJ staff writer,Laurie Blank. Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.
There’s a common belief in the personal finance world that getting a big tax refund is not a smart financial move. And I tend to agree – mostly.
The theory behind the benefits of getting a small refund – or even having to pay in a bit – is that you’re better off keeping your money yourself, changing your withholding to a bigger number so that you can use or invest your money and make a profit rather than letting Uncle Sam borrow it free of charge for the year.
You certainly don’t get the same benefit of interest-free loans at your local bank or other financial institution. Instead, you’ll likely pay interest on the life of your loan – banks are in business to make a profit, after all. So, why should you let the government borrow your money for free?
According to this article, the average federal tax refund is nearly three thousand dollars; $2,895 to be exact.
If you’re in with the average, you’re letting the government borrow nearly $250 per month from you, every month, and you’re not making a dime off of them.
Conversely, if you took that $250 a month and invested it in a mutual fund earning 10%, you’d have an additional $135 at the end of a year. While that may seem like small potatoes, you may want to consider the long term.
Thanks to compounding interest, that same $250 a month at the same interest rate over a ten-year period would result in a total investment account balance of over $49,000 – quite a profit on your $30,000 investment.
So, considering the opportunities you’d have for growing wealth by keeping more money throughout the year and investing it, is there ever a time when it would be okay to get a big tax refund?
Maybe. Consider the following scenarios. If you’re in one of these situations, you might want to keep your withholding at a higher rate and get a nice, fat check from Uncle Sam in April.
You’re Not Disciplined in Your Money Management
If you’re not a disciplined spender and/or saver, you could benefit from a big tax return – IF you choose to save some of that money in an emergency fund or for retirement. Now, granted, those who aren’t disciplined with their money to begin with may have trouble saving some of their tax refunds.
However, sometimes it’s easier to save if you get a big lump sum. And you don’t even have to save it all. Pick a percentage that you’ll save, a percentage you’ll put toward necessary expenses (like new tires for your car) and a percentage that you’ll blow on stupid stuff.
Setting aside part of the money for each of those three categories will help you to feel treated as you have fun with some of the money, yet you’ll be using some of it to improve your financial situation as well.
You Need the Psychological Boost of a Big Tax Return
If you’ve been struggling with money for a longer period of time, or if you have hidden money fears from childhood or other circumstances, you may benefit from the psychological boost of a big tax return.
When I was growing up we were very, very poor. After I started working and getting bigger tax refunds, I found that the windfall I received gave me a sense of financial security; a sense of knowing that there is money out there for those willing to go after it.
If you have a scarcity mindset, a big tax return may be just what you need to help you overcome that fear of lack.
You Need a Windfall for a Financial Goal
A big tax return can be a huge help in setting you up for a bigger financial goal, such as saving to pay cash for a car, a vacation or a down payment on a house. This is especially true for those who aren’t great savers.
If your savings skills could use a boost, but you still need to save for a big financial goal, consider using your tax refund to do so.
You Don’t Have the Cash to Pay if You Should Owe
If you’re in a situation where money is super tight and having to pay in at tax time would really knock your budget off track, you may be better off overestimating what you owe and paying in via your weekly paycheck, even if that means you’ll get a huge refund at the end of the year.
Getting a big refund is far better than having to put yourself or your family in financial jeopardy if you have to pay in and don’t have a way to get the cash.
Conclusions
I have to be upfront and say that in general, I’m a big believer in not getting a big tax refund and using your money to save and invest on your own.
However, I’ve come to have this mindset only after years of training myself to be a good saver and to overcome a fear of a lack of money.
If you’re struggling with any of the situations above, you may be better off taking that large refund check every spring.
***Photo courtesy of https://www.flickr.com/photos/infrogmation/3216700056/in/photolist-5UfqRN-nm8dXj-gRbN5-5p6qT7-TeakqK-bRqLNe-5qn1Fa-Si8Arb
