Last week, I put up an infographic about how Americans will spend their tax refunds this year. This graphic had an average of about $3,100, but after doing some research, that might be going up. Either way, this is over $3,000 of a refund. That’s a big chunk of change. What irritates me about this number is the number of companies that want you to spend your tax refund buying something. Use your refund to get into a new car. Buy new furniture, and so on. There are so many ads out there trying to pry that refund right our of your hands the moment it lands in your bank account. On top of that, getting a big tax refund means one thing. You’re doing your taxes wrong.
Stop Using Taxes as a Bank Account!
Do you know what it means when you get a tax refund? It means you paid too much to the government based on a number of factors. Everyone loves getting a refund, but I hate it. Why? I don’t like giving the government an interest free loan. I’m giving them extra money to do what they want with and I don’t get any interest back. The government is getting free money each and every year from people. 66% of people filing taxes are expecting a refund. That’s a lot of interest free money the government gets to use every year. After they use it, they just give it back to you. I hate it. I want my money to earn money for me. That’s what it’s for!
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The key with taxes is to try to get as close to zero as possible. Meaning you don’t owe money and you don’t get a refund back. This means you maximized your withholdings and did everything correctly. Zero is the game here, but many people don’t play and it irritates me. Stop using the government as your savings account.
Imagine this. If you played your cards right and maximized all of your tax positions, you could keep $258 per month for the year if you got the average refund. That’s $258 each and every month where you could use for your own purpose. For some, $258 is life changing each month. It allows them to pay down more debt or make another payment on time. Instead, we have a large sum of people who love to get a refund. They look forward to it every year. Why?
People Don’t Trust Themselves to Save
A few years ago, I was listening to NPR and they were talking about this same thing. They had tax pros on the show trying to get people to stop focusing on the tax refund. They were trying to show that others would benefit more if they held more of their money over the course of the year. I would agree. The biggest argument was that people don’t trust themselves to use the extra money wisely. They don’t trust themselves to save it. That makes my heart hurt.
We have such a problem in this country with saving money. While the concept is very known and people understand they have to save money for things, yet when it comes down to it, we just don’t do it. We spend it on things we probably don’t need, just want. Our emotions get the best of our rational thought and puts us into debt. It’s a problem. This is exasperated at tax time.
Most people who can’t save, can’t do well with a windfall of money. Tax refunds are considered a windfall, especially if you’re getting a check for $3,000! As shown in the infographic the other day, some people will use it to pay off debt, which is awesome! Others will use it for vacations and just general spending. Waiting for this tax windfall is just a bad idea. There are too many things which can go wrong.
Stop Doing it Wrong!
I’m sure there are people who will disagree with me and that’s fine. Many people do. I have a thick skin, so I can take it. I want people to stop using the government as their short-term savings account. Stop pushing for a bigger and bigger refund. You need to be focusing on keeping more of your money throughout the year and not seeing any refund. Remember, zero is where you want to be. Don’t owe and don’t get a refund. That’s the ultimate goal.
I would rather take $258 each month and put it in my Betterment account or my Motif Investing account. As I noted, I want my money to grow. I might be a novice investor, but I’m still an investor. When I invest, I expect my money to grow. Giving it to the government with an interest-free IOU is not my idea of investing. Unfortunately, it seems to be others’ grand scheme in order to save their money each year. Too bad it doesn’t work most of the time!
For a country that hates to overpay for things, I’m surprised we are OK with it when it comes to taxes. We penny pinch and extreme coupon until our hands fall off just to save money here and there, but our biggest savings could just be with our taxes. We gladly overpay our taxes and then focus on cutting expenses until there are none left to cut. We have it all wrong people. Some people’s biggest expense could be their poor tax positions, which can easy be optimized to keep more of the money they earned. Think about it!
Can we please stop focusing on the tax refund and try to get people to optimize their tax positions in order to pay no more and get no refund? Shouldn’t that be the real goal? Let’s try to keep more of our money every month instead of getting giddy about tax refund season.