Many people would argue that getting a large refund is a great thing. At face value it is – if given the choice of owing money come April 15th or getting a large refund I would definitely choose getting a large refund 10 times out of 10. Now, on the other hand, if I could determine, from all possible scenarios, what my outcome would be, I would choose either breaking even or even owing a couple bucks. Why would I make such a decision like that?
Outisde of your family and good friends, who would you lend money to without charging interest? Probably no one. When you’re buying a house, a car, or even using your credit card, the bank doesn’t lend you that money without charging you some interest so why would you do the same to the government? A refund on your income tax return is essentially an interest free loan to the government for the year. Well do I have any choice? I go to work, they take taxes and give me what’s left. What can I do?
1) change your withholding using Form W-4 putting more money in your pocket
2) use that extra money to a) pay down credit card debt, b) put away for a “rainy day”, c) pay off some other debt (student loan, car loan, mortgage, etc.), and/or d) contribute more to your retirement plan or brokerage account
The amount that you will save in interest payments or gain from compounded interest will be great!
But if it’s in my bank account I’ll spend it! Good point and one that we hear OFTEN. This is one reason that I like option “D” above – contribute more to your retirement plan. If it’s throughyour employer, it comes out automatically and you never see it (and remember, an extra $100 401(k) contribution does not mean a $100 reduction in take home pay; it’s slightly less)
If you are already contributing the max or your employer doesn’t offer a plan, most payroll companies will split direct deposits into multiple accounts. You can take the same “net” amount that you’ve been receiving and keep that going to your checking account then anything additional going to a separate savings account that you never touch. You will be amazed at how fast this will grow.
So the next time someone brags to you about how much they got back, you can look at them and say “Oh, that’s too bad. I owed a little but now have no car payment.”