March 8, 2021
Listen, I get it. It feels nice each spring to get a “bonus” in the mail or direct deposited into your account. I’m talking about the thing so many Americans plan on and look forward to: a big, fat tax refund check from Uncle Sam.
CNBC just released a study that found “Most Americans who expect a tax refund say it’s important to their financial well-being”*. And while I get the sentiment of the article, especially highlighting the fact that the COVID-19 pandemic has disproportionally affected job security based on which industry you find yourself in, it reminded me of a simple truth that most people don’t think much of.
We need a mindset shift.
If you are receiving a significant amount of money back from the IRS each year in the form of a tax refund, you have just lent YOUR money to the government, interest-free for 12 months. It’s not a “bonus” check they are giving you for being such a good little worker. It was yours all along, you just overpaid them and they are mandated to return it to you! And while it can be a forced savings plan for many who don’t follow a budget, it creates a potentially harmful mindset in us and robs us of the opportunity to do something valuable with that money.
The average tax refund in America in 2019 was $2,781. Let’s look at that number a different way. That’s $231.75 per month extra you could have had in your paycheck. Now, I’m not recommending you take your paid-in taxes down to the point you are absolutely break-even (unless your income is completely stable and your life circumstances don’t change year to year), because I wouldn’t want you to run the risk of owing the IRS an unexpected bill come April 15. However, let’s just say you can get $200 of your money back in your wallet per month. That would still leave you with a $381 refund at the end of the year.
Now let’s make a plan to invest that money, because we weren’t used to spending it anyway. $200 invested per month in a well-diversified, low-cost portfolio, over 30 years could yield you as much as $298,000 or more!**
Wow, I just found you 300 grand!
We simply used funds you didn’t ever think about that the government used to “hold” onto for free. That’s the power of opportunity cost and compound interest.
So how do you get access to that money if you are receiving a few thousand dollars each year in tax refunds? The answer to that would be some combination of working with your HR person and/or tax professional. But what I want you to remember is, it’s your hard earned money and you should have the power to use it to benefit YOU, not the government. Get on a written plan & budget today so you can tell your money where to go. And be aware of everything that comes out of your gross pay and make sure it’s the most effective use of your hard-earned dollars & cents!
*”Most Americans who expect a tax refund say it’s important to their financial well-being”, appearing on CNBC.com, a division of NBCUniversal
**assuming an 8% yearly interest rate, compounded
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