Each year I contemplate what I should do with my tax refund check from the government, and each year I go back and forth between a couple of options. It is interesting how I can talk myself out of buying almost anything.
Understanding the Tax Refund
In all reality, getting a refund on your taxes is actually the worst thing that could happen to you. I would rather have to pay the government a few hundred dollars each year than get a couple of thousand in return. To the average person this sounds crazy, but it is absolutely true.
You see, the government only returns money to you if you have already paid too much tax throughout the course of the year. In essence, you have given the government an interest free loan in the amount of your tax return! When is the last time you received an interest free loan?
Look At Taxes This Way
What if you could keep all of the money that you pay to the government in taxes for the entire year and invest it? If you were savvy enough to invest this money in a high interest savings account at ING or the like, you could actually earn interest on the government’s money all year long and then make one lump sum payment at tax time – keeping the earned interest for yourself. That sounds better doesn’t it?
What I just mentioned is exactly what the government does with your tax refund dollars. Because you paid too much in taxes over the course of the year, the government gets to invest that money (your money) and earn a return on it.
When you submit your tax return they say…oops! Here you go, this is the amount of money that you over paid in taxes – but they keep the earned interest.
What to Do
Now, I believe that we should go on paying taxes as usual through deductions from our regular pay checks because most of us are not financially astute enough to save the money for a year for the purpose of paying taxes. However, if you are consistently getting large refunds, ask your employer to withhold less from each check.
Wouldn’t you rather have the money in your savings account earning you money instead of giving the government an interest free loan until April?
Each year when I receive my tax refund, which is usually just a couple of hundred dollars no that I have adjusted the amount withheld from my pay, I contemplate what to do with it.
Part of me wants to spend it on something frivolous like a small plasma television for the basement family room or a camcorder to record family events etc. On the other hand, I think I should invest it in a speculative stock that I have been looking at on the chance that it will return 10X over.
I’m still not certain what I will do this year, so it will sit in my savings account for now.
What will you do with your tax refund?