DOLLARS AND SENSE

by Joe Plemon

BIG TAX REFUND IS BAD IDEA

If you are average, you received a $2770 IRS refund this year. When you got that check, did you think that you somehow “won”? Hey! It makes sense. You aren’t used to getting money from the government, so you have this perception that you beat them…that you even got by with paying less taxes.

Newsflash! You didn’t win. You didn’t pay less taxes. You made an interest free loan to the government over the past year and you didn’t even have access to your money until they decided to send it back to you. There is nothing smart or sophisticated about getting a big refund. And $2770 is ridiculous! You need to change your W-4 tomorrow so that you will have the use of your money throughout the coming year.

You may rationalize by saying, “But Joe, this is a forced savings plan. It is the only way I know to save.” But listen to yourself. You are admitting that you are not capable of managing your income throughout the year. The solution is not to loan the government money, but to wake up and start working on a budget.

“But Joe,” you say, “We use our refund to reduce debt.” Good idea, but you could have been attacking that debt throughout the year with no refund and an additional $231 a month.

What if, instead of making a direct deposit to the IRS each paycheck, you made one to a good mutual fund? Over a normal 40 year working life time, that same deposit would have grown to $2,720,000!

You may be the rare person who invests their refund, but the time cost of investing at the end of the year compared to investing it every month throughout the year will cost you $150,000 over the same 40 year period.

Making interest free loans to the government is simply not smart. Keep your money and let it work for you.