Kris and I received $2789 in tax refunds this year.
Already I can hear the sound of hundreds of heads thumping against hundreds of desks. Many of you are wailing, “Why?! Why?! Why?!” Of all the financial choices a person can make, getting a large refund is universally considered one of the dumbest. Magazines advise against it. Books advise against it. Blogs advise against it. Yet every year, millions of Americans like me use their tax refund as a sort of forced savings account.
Why do we do it?
The arguments against a big refund
First, let’s examine the reasons a person shouldn’t get a big tax refund.
- “You’re giving an interest-free loan to the government!” The implication is that this is a stupid idea. My response is generally, “So what?” I don’t mind giving an interest-free loan to the government. I view it as a form of short-term charity. It doesn’t bother me.
- “You’re cheating yourself of cash-flow!” If you receive a refund, you’ve had extra money withheld from each paycheck. In my case, I’m having more than $100/month extra withheld. For some, this money can make a real difference in day-to-day living. In fact, it may be the difference between having to use credit or not. There’s merit to this argument, but it doesn’t apply to me. I’m not that pinched.
- “That money could be invested at a high rate of return!” This argument I grant to be convincing, and I don’t have a rebuttal. Not only does a tax refund give your money to the government interest-free, it also deprives you of the chance to earn a return on the money.
If there are clear reasons not to get a tax refund, then why do it?
The argument for a big tax refund
I suspect that everyone who chooses to get a big tax refund does so for the same reason. It’s a psychological trick. I like the lump-sum windfall.
In the past, I was a poor money manager. There was no way I could have saved an extra $50 per paycheck. I would have spent it. But by electing to receive a large refund, I imposed a forced savings plan on myself. Over the years, this enabled me to:
- Purchase a brand-new Bianchi Volpe touring bicycle
- Purchase a refurbished Macintosh G5 tower
- Save money for a cruise to Alaska
Not all of my refund-based purchases were smart. Last year I spent all the money on comic books. That was dumb. Here are all the things I’ve done with this year’s refund:
- I spent $150 on comic books (my only comic book splurge so far this year)
- I spent $90 on lectures from The Teaching Company
- I put some into savings for our vacation this summer
- I used some to pay for continued work with my wellness coach
- And I used $1000 to pay off debt
I consider this a fine balance, a perfect use of a small windfall.
Why I won’t pursue a tax refund in the future
Having said this, this is probably my last big refund. At this point in my life, based on what I know about money, a tax refund is a poor choice. I have developed enough self-discipline to use my money wisely, even when it comes in small chunks.
But I’m not going to argue that you shouldn’t get a refund. Do what works for you. If a large refund makes you happy, by all means do it. If it helps you to save, then do it. However, as with the debt snowball, realize that you are paying a mathematical penalty for doing so.
Source: getrichslowly.org