DETROIT – It’s a match made in heaven. You start thinking now about doing your taxes because you have a big refund coming.
In 2015, the IRS said the average refund was roughly $3,000. You get that hot cash in your hand and you want to spend now - on something big! It’s precisely at that moment you start hearing the screaming radio and television ads from furniture, appliance and big box retailers along with car dealers pleading with you to make your next big ticket purchase with your big tax return in their well stocked store. Uncle Sam smiles and tells you this is how the economy improves. You are getting suckered in big time fashion!
Let me ask you a question: would you lend a friend a little money each week all year and your friend offers as the only bonus for that loan agreement he/she will pay you back your money all at once? That’s the deal you’re making with Uncle Sam. Does it make much sense? Not for you! Uncle Sam loves it because he earns the interest on your cash and uses it for his purposes.
You see, your tax return is the overage on the amount of money you allowed the federal government to take from your paycheck. Often, you did this when you first started your job years ago. Choosing your withholding amount initially was shooting in the dark. Most of us don’t know what will get taken from our paychecks at that moment, and the human resources people at your company can only guess. So, chances are, if you have worked at the same place for a long time and did not make any changes to your tax withholding to adjust to your changing lifestyle over time, then you are vastly over withholding without realizing your mistake.
The big “bonus” check in April is a real treat to your cash flow and can sometimes lead to more spending instead of paying down debt, saving or even investing.
In the end, you made a bad deal. All you are doing is giving the federal government an interest free loan for the privilege of getting your money back in a lump sum. Do you really want to give the government your money to play with for a year? I didn’t think so. Wouldn’t you rather have the cash in your pocket every week all year instead of the government? Now you’re talking. It will certainly help you manage your family budget more accurately.
Here is how you fix this: If you are getting a $3,000 refund, you are having $120 a week too much taken from your paycheck. You should pay a visit to your human resources department as soon as possible and have your withholding reduced. You will immediately see the money in your pocket and you can stop thinking about getting a big refund. Keeping your refund as close to zero as possible is the absolute best pathway to help yourself financially. You can focus your attention on [God forbid] saving a little money and taking more control of your finances.
Now be careful, don’t overdo it and end up OWING Uncle Sam $3,000.
Do the math, and make sure if you get a pay cut or your life circumstances change appreciably that will drive up your tax bill that you change your withholding to match. Ignore the ads, help yourself and tell Uncle Sam to stop being a contributor to financial foolishness.