Last week marked the end of another tax season, and I’ve heard a lot of people talk about the size of their refund: some disappointed and others thrilled. But the true winners are those who owed and received nothing. They managed their withholding and estimates correctly, and here’s why:
It’s Your Money
You have probably heard the argument that you’re giving the government an interest free loan, and it’s true. But because people trick themselves into thinking it’s an “unexpected” windfall, it feels like a gift from the government. But what if I told you that if you give me a few hundred dollars from every paycheck, I’ll hold onto it until April? Oh, and I’m not going to pay you any interest. When you put it in that context, it sounds absurd, doesn’t it?
It’s Easy to Spend
The estimated average federal refund for the 2016 tax year is about $3,000, which is $250 per month in tax overpayments, but you are way more likely to blow the refund. First, it’s easier to spend someone else’s money, so if it’s “unexpected,” then there’s less guilt. Second, you can do a lot more with $3,000 than you can $250. If you’re walking around with that much cash burning a hole in your pocket, you’re going to spend it.
But It’s Better to Save
Let’s assume you don’t go full lotto-winner crazy and spend it all, but instead, you take this one behavior modification seriously: you change your W-4 and put back the $250 per month difference into an investment account. This change should not drastically affect your lifestyle—Your monthly take home pay will remain the same; you just won’t have that April windfall to spend. If you start at the age of 25 and assume a 6% average return on your money, when you turn 65, the account will be worth $500,000.
I know it feels good to get back a tax refund, but that doesn’t mean it is good. It’s your money, so why not keep it and do what’s best for you?
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.