Big Tax Refunds: A Win or Fail?
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Tax season is here and for many families that means receiving a tax refund. Did you know that last year the average tax refund was $2895?
That's a nice chunk of change that you can use to pay down debts, build up savings, or invest with some leftover to have a small splurge.
But is having a big tax refund a good thing?
Many personal finance journalists and writers have very strong and opposing opinions on them.
Let's look at both sides and see if we can find the best solution for you and your family.
Why Tax Refunds Rock
Let's start with why getting a big tax refund is a win.
A large amount at once can be psychologically empowering rather than smaller ones spread throughout the year.
If you have credit card debt, for example, having a couple of grand to use may be push you to just go ahead and get rid of that debt (or at least lower it considerably).
You may also choose to be conservative so you get a refund rather than getting hit with a penalty.
Being self-employed my income varies year to year and can fluctuate during seasons. I prefer playing it safe with my estimated taxes.
It may not be a solution for you, but it works for us.
If you're looking to file your taxes and getting the biggest refund, check out TurboTax. We've been using them for years and have been happy.
How You're Not Getting Further with Big Tax Refunds
The other side of the arguement is big tax refunds are basically an interest free loan to the goverment.
A refund is simply you overpaying what you owe and waiting
No one is going to care about your finances as you do, so having that money to spend as it is available is practical.
If you automate your finances, having more money in your paycheck can allow you to pay down your debts or save up faster.
So while I don't think you should feel guilty about getting a big refund, I do think it's smart to review and update your withholdings so your paychecks are bigger.
You think that small amounts don't really do much, but if you set up automatic transfers, you can easily reach your financial goals faster.
Make the Most of Your Money
I think the larger factor in determining whether or not a big refund is a win is how you use it.
Big refunds can be a wonderful way to improve your finances in one swoop.
- Pay Down/Off Your Debts: Getting rid of your high interest debts is a huge win. You'll then be able to use what you had been making as monthly payments into something more productive.
- Boost Your Savings: If you don't have an emergency fund, this would be a quick way to start one. Stash your money in a high interest savings account at your bank or credit union.
- Invest in Your Future: Yes, you should definitely consider putting more into your IRA, but don't forget that there are others ways you can invest. Signing up to get a certification for an in demand skill is a smart investment.
With so many choices, you two should sit down and see what works best for your situation. You may want to split it up between goals or go all in on one.
Spending a portion of your money on something fun isn't bad, but just do yourself a favor and make sure you priortize so you make progress on your big goals.
Thoughts on Tax Refunds
You know how I feel about them, but I'd like to hear from you – what do you think about big tax refunds?
Are they a big win or would you rather have them sprinkled in your paycheck?
This episode was originally released in January 2016. It’s been updated January 2019.
This post may contain affiliate links. Please read my full disclosure for more info.