Financial Idea's Blog

What’s Wrong With Getting A Big Tax Refund?

The obvious answer here seems to be “nothing”.  But actually, it’s a big something.

I know many people who tell me that getting a big tax refund is actually a part of their “budget”, because it means they know that every April they can take a family vacation or upgrade their big screen TV or pay off some more debt or whatever it is in their case.

The first bit of honest truth is that these people don’t have a budget.  A budget is something you create and live by, with periodic adjustments, which is intended to keep you living within your means and actually saving and investing for your future as well.  It doesn’t allow for splurging without planning.

(On that note, before you all click the back button in disgust J, it is still possible with a budget to take a family vacation and upgrade your TV, you just have to plan for it and allocate a bit each paycheck instead of getting wild and crazy every April!)

Last off topic bit about budgeting, make sure that whatever budget form you use, that it starts with you putting down your Gross Income at the top, and the VERY NEXT THING should be how much you can save and invest.  If that is 10% of your gross income, you have a pretty good chance of reaching some of your goals.  If it’s 20%, you have really good chance of reaching all of your goals.  After that comes taxes, housing, insurance, utilities and everything else.  Most budget forms have taxes and such right after income, with saving at the bottom.  That says “save whatever is left over”, while the message should be “pay yourself first.”  Ok, I’ll get off that soapbox for now.

Why don’t you want a big refund?  Simple, because it means that you’ve been paying too much every paycheck in taxes, and they’re just giving you back your own money, AND they’re giving it back to you after using it for up to a year, with ZERO INTEREST.

Guess what happens if you’re short in paying them?  There’s a possibility of interest AND penalties.

With just a little bit of discipline, you can increase the withholding exemptions on your W-4 form, so that your company withholds a little bit less for the federal government and your paycheck is that much larger.  Now, instead of spending that extra because you have it, you add to your budget the capability to save and invest that amount.  Now it’s working for you.  If you want to save it for a vacation, so be it, it’s still working for you in the meantime, making interest which you get to keep!

That said, you still need to be fully aware of what you need to be prepared to retire someday, and that needs to take the front seat.  You can’t borrow for retirement, at least not in this world or not yet anyway, and it wouldn’t make sense for anyone to lend you money you can never pay back.  (Don’t get me started on subprime mortgages.  J).

Want to know more?  Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: tax deduction, tax rebate, tax refund, US finance

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