The Tax Refund Dilemma

tax refund

75% of you will receive a tax refund this year. 58% of Americans withhold more money than needed from their paycheck intentionally so they can receive a refund, and the average tax refund this year will be around $2,800 – that’s an additional $233 a month of income headed to the government unnecessarily!

Many people decide to pay more taxes on a monthly basis in order to receive a nice lump sum each April because they know they would otherwise spend that money. Taxes are a way of forcing themselves into saving money in order to pay off debt, save for vacation, etc.

The only problem with this logic is that, while you’re letting the government keep your money “interest free,” you continue paying monthly interest on your car loans, credit cards, student loans, and other debt. You’d be much better off designating those $200 a month to eliminating debt, but that, of course, would require discipline and dedication.

If you have this tax refund dilemma, here are few ideas to chew on:

1.   Consider adjusting your withholdings so you receive just a few hundred and not few thousand of your hard earned dollars back each year. Use this additional sum of money every month towards a designated debt. Once you eliminate that debt, apply this amount to the next bill in line.

2.   If you’re afraid you will just spend those dollars, ask your HR department to direct deposit those funds into a separate account.  Use those funds to start building your emergency fund!

3.   If you already have an emergency fund, set up automatic bill pay from this account to a payee of your choice and otherwise leave the account alone! “Out of sight, out of mind” may be what you’ll need in order to give those funds a chance to do their job, which is to help you ditch debt fast! Once your debts are paid off, keep putting money in that account until you have 3-6 months of living expenses set aside.

4.   If you are looking to take the next step, open a Roth IRA account and direct deposit those funds into that account every month. You can invest up to $5500 a year in your Roth IRA.

5. If you stick with your current strategy of getting your yearly tax refund, do not opt for a Refund Anticipation Loan (RAL). The interest rates on these loans can be as high as 200%! You could literally pay hundreds dollars on a couple thousand dollar loan. It’s better to wait for a week or a few weeks and receive 100% of your hard earned money!

For those of you who’ve always received a sizable tax refund, changing up your refund strategy can be scary, since you’re counting on those funds to cover certain expenses and bills.

But since the money you’re receiving is not an “extra” bonus, but actual earnings you could be receiving in your monthly paycheck, with just a little bit of discipline. You could be putting those funds to work on a monthly basis, by either paying off debt that costs you interest or setting those funds aside in an interest-earning savings account. Otherwise, you’re just making a monthly “interest-free” loan to the government!