Financial experts along with many personal finance bloggers frown upon getting tax refunds. Why? They actually have a valid point—why loan the government free money when you can use it to your advantage? It makes sense. You could be using that extra money each paycheck to contribute to your retirement funds, invest, pay off debt or build up your emergency fund or other savings accounts.
Most of us would probably agree that the interest on savings accounts is pretty crappy right now; the same can be said for most CDs (certificates of deposit) as well. So by putting the money in savings, you’re not going to be making much money off the interest. Which is perfectly fine, making something is better than nothing.
I just don’t see it being that beneficial in our situation. We contribute money to our retirement; we recently increased our 401k contributions to 8% and plan to increase to 10% later this year. We put money into our Roth IRA, granted it’s not a lot, but $50 each month is better than nothing at all—we’re creating a habit. Our debt is almost eliminated, plus we have an Emergency Fund that we’re still adding money to each month. Overall though, we would only be seeing a take-home increase of around $100 with each paycheck if we adjusted our withholding.
Is an extra $100 per paycheck worth it? Not to us. We’ve gone down that road before, and I’ll tell you, it’s not worth the chance of owing taxes at the end of the year. That’s just one of the downside of having unpredictable income, you never know how things will turn out. I remember the one (and only) year we ended up owing taxes; it really sucked trying to scramble to get the money together. I prefer the stress-free approach to taxes, even if it’s not the best choice—it works for us.
Getting a large chunk of money back at once also has its benefits. We work pretty hard to keep our spending in check and like to take advantage of the tax refunds we receive when we efile. We’ve used them to pay off debt, beef up savings accounts, take vacations and for larger purchases that can be put off until tax time. This is just something that works for us, we know it’s not “free money,” but getting it in larger amounts can be more beneficial.
This year, we were planning to use our tax refund to spend a couple of weeks in Europe. Unfortunately, Honey was concerned that it wouldn’t be enough to feel financially comfortable. So instead, we will be heading to Denver for the Financial Blogger Conference and go to Europe next year. I guess my point is that normally (without tax refunds) going on a vacation to Europe isn’t something that would be within our grasp. Saving little bits of money here and there would make it feel like forever, even though we would eventually get there. Getting tax refunds gives us the ability to take advantage of more financial opportunities and do things in larger increments.
Tax refunds can be either bad or good, but I think it really depends on each person’s financial situation and their financial goals.
Do you get a tax refund?
Why or why not?
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