It’s a match made in heaven right? You start thinking now about doing your taxes early this year because you have a big refund coming.
In 2016 the IRS says the average refund was just over three thousand dollars. You get that hot cash in your hand and you want to spend it now; on something big! It’s precisely at that moment, not coincidently, 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. Uncle Sam smiles and tells you this is how the economy improves. You are getting suckered!
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 with no interest paid? 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. In the end, there is nothing “heavenly” about this deal. Wouldn’t you rather have the cash in your pocket every week all year instead? It will certainly help you manage your family budget more precisely.
The fact this system exists is a study in how you end up a servant to everyone else’s interest if you don’t protect yourself. So let’s begin by getting real about your interest in this situation. Your tax refund is the overage on the amount of money you allowed the federal government to take from your paycheck, using your employer as the middle-man. Often you did this when you first started your job years ago. When you chose your withholding amount initially you were shooting in the dark.
Most of us don’t know what will get taken from our paychecks and the human resources people at your company can only largely guess as well. So, chances are, if you have worked at the same place for a long time and did not make any changes to your withholding to adjust to lifestyle changes, like new children, or children growing up and leaving home, or a divorce, you are vastly over withholding without realizing your mistake.
The big “bonus” check in April is a treat to your cash flow and but can sometimes lead to more spending instead of paying down debt, saving or even investing.
Here is how you fix this and it’s simple. If you are getting a three thousand dollar refund you are having $120 a bi-monthly pay period 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. By keeping your refund as close to zero as possible you have found one of the best ways 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, there is a flip side to this coin. Don’t overdo it and end up OWING Uncle Sam three thousand dollars.
Do the math, keep tabs on this at least annually and make sure if you get a pay cut or your life circumstances change that will drive up your tax bill, you adjust your withholding accordingly. Ignore the ads, help yourself and tell Uncle Sam you’ve decided to stop contributing to financial foolishness.
Rod Meloni CFP®