We sure are getting close to April 18th!
If you read Dealing with Financial Stress, you’ll know that I won’t be one of the roughly 80 percent of Americans who receive a tax refund. On average, those who receive refunds get a $2,800 check in the mail. Now this money isn’t really from the IRS. It’s called a refund for a reason: it was your money to begin with!
The marketing geniuses have figured out that they can trick you into believing that this wasn’t your money to begin with though. They will try to convince you to spend it like you never had to work for it. And so many people do! Let’s not forget–you worked for every penny that you receive in a tax refund. Don’t let the “Tax Refund Special!” lure you in. As we discussed in Love Thy Money, those dollars are directly correlated to hours of your life.
Since I’m not getting a refund, I can’t really share an exciting story of what I plan on doing with mine. From an advice standpoint, mine is pretty straight forward: follow the What Should I Do With My Money flowchart. Done. Doesn’t make the most interesting of blog posts because it’s already been discussed. Instead, I think it would be a fun exercise to take a look at what some of the other popular money bloggers out there are doing with their refunds. So let’s take a look:
Steve from Steveonomics
This year I ended up owing $2,500 but the previous couple of years I received a refund. Whenever I get a refund I always put it in my Traditional IRA. It’s boring but it works. I’m a big advocate of maxing out retirement accounts to pay the least amount of tax possible!
James from Retirement Savvy
Unfortunately – or perhaps fortunately as my household income has increased substantially – it has been a number of years since I received a tax refund. Over the last few years my attention has focused on minimizing the amount of the tax payment and saving the money to meet that obligation. During the many years I received a tax refund my focus was on three priorities: contributing to my emergency fund, reducing credit card debt and contributing to an IRA … in that order. Ensuring there is adequate money to address unforeseen events, eliminating debt and saving for your future is a sure fire way to sleep well at night.
The Vagabond from Frugal Vagabond
I don’t believe in giving the government an interest-free loan! Whenever possible, I would rather receive no refund, or even owe a small tax payment at the end of the year. I’m self-employed, so I make quarterly payments to the government for taxes due. The down side is that I have to set aside those payments and not invest them elsehere. On the plus side, I am able to monitor my income over the course of the year and decrease or increase my payments to make sure I don’t get a refund. Instead, I invest every single available penny into either rental properties or index funds. I’m still working with my fiancée to change her perspective on tax refunds, but we’re getting there!
Mr. Groovy from Freedom is Groovy
We overpaid quarterly estimated taxes and will be getting a refund of $2,000. We’ll spend it on a road trip we’re planning in November, after we quit our jobs. One highlight we’re really looking forward to is taking the “Louisiana Gumbo Trail” in search of the perfect gumbo (as if we know what that is). Mrs. Groovy is excited about tasting a real New Orleans beignet.
Derek from Life and My Finances
My wife and I are pretty boring. Our tax refund should be pretty small – considering we don’t want to give the government a free loan all year – but our extra money will go toward our next investment property. We already bought one with cash – now it’s about time to buy another!
Something interesting I noticed is that two out of the five people I interviewed aren’t getting a refund. Two more are getting a very small one. That little fact definitely made me feel a little less alone in having to cough up a lump of dough for the IRS. What is at the root of this though?
My theory is that people who take pride in their personal finances love to optimize every dollar they earn. This is exactly what the Vagabond is saying when he mentions that he doesn’t like giving the government an interest-free loan. With today’s low interest rates, you aren’t missing out on a ton of interest by overpaying your taxes, but it isn’t about the dollar amount. It’s about running a tight ship and maximizing the work that each dollar does for you. By being deliberate in every small financial move, it adds up to something bigger.
As Mr. Groovy pointed out, it is also important to not lose sight of the big picture. Life, that is. Money is a tool. I often preach about using it in a way to make you more money, but that isn’t what life is all about. If your financial picture is looking really nice, then maybe you should use your refund on something special. That something special though doesn’t translate to new fancy consumerist item. The pursuit of the perfect gumbo with your loved one definitely qualifies as something special.
One last thing is apparent. Don’t stress out too much if you owe on taxes or receive a very small refund. Take it as a sign. You’re among a crowd that tends to be good with money.