The smaller the tax refund, the better

Tax Time

Tax Time

I have an Mvelopes coaching customer that purposefully has extra money withheld for taxes so that he gets a larger refund at tax time.  During the year he relies on credit cards to get by if he doesn’t have enough income.  He carries a balance on those credit cards and then uses the tax refund to pay the balances off.  This may sound like a pretty smooth way to handle things, until you really start looking at how much this method is costing him.

First, he is allowing the government the use of his money throughout the year, rather than having access to it himself.  If he had this money in his bank account, he would have an easier time living within his income, and wouldn’t need to rely on credit cards to make up the difference.

The second problem is that by carrying a balance on his credit cards throughout the year, he is spending a lot of extra money on interest charges.  Using credit cards can be a great way to earn miles, points or extra cash, but it’s only effective if you pay off your balance each and every month so that you don’t have interest charges.

The third and final problem with this method, and perhaps the biggest issue, is that he was simply planning to overspend his income going into each year, rather than making the effort to live comfortably within his means.   Spending less than you make on a consistent basis is truly the best way to improve your financial future and increase your wealth.

After being introduced to Mvelopes and the principles of envelope budgeting, he is now dedicated to living within his means and is working to adjust his tax withholdings.  Hopefully this year he will realize that having that money available for his own use is far better than letting the government borrow it for a year without paying him any interest.

-Jennifer Streiff, Mvelopes Personal Finance Trainer